Accounting Principles Flashcards
What is VAT?
VAT stands for Value Added Tax.
It is a consumption based tax and is applied when value is added at each point of the supply chain.
When must a company pay VAT?
A company must be VAT registered when they turn over more than £90,000.00 a year. They can also choose to register if their turnover is less than this.
What are your responsibilities in you are a VAT registered company?
My responsibilities would include:
- Include VAT on invoices selling goods and services at the correct rate.
- Keep a record of the VAT i pay when purchasing goods or services for my business.
- Account for any VAT I pay on goods I import into the UK.
- Complete a VAT return every 3 months.
- Pay any VAT I owe to HRMC.
Note: The VAT I will pay is the difference between any VAT you’ve paid to other businesses, and the VAT you’ve charged your customers.
If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC.
What is corporation tax?
Corporation tax is a tax paid by all companies who operate in the UK. It is calculated on the annual profit a business makes. As of 2024, corporation tax is set at 25%. You pay 19% if your profit is less than £50,000.00, and 25% if its over £250,000.00. Between these figures you pay the main rate (25%), reduced by a marginal relief.
What are company accounts?
Company accounts are a requirement by law, they demonstrate a companies financial standing through a profit and loss account, balance sheets and ensure cashflow through a cashflow forecast. They are produced once a year, are audited, and are published to HMRC and companies house.
What is a balance sheet?
A balance sheet is a snapshot of a company’s financial position at any given point in time. It report’s on a company’s assets, liabilities and ownership equity.
What is a P&L Account?
A profit and loss account shows a company’s revenue and expenditure over a given period, typically monthly and then consolidated at the end of the financial year to determine if a company has made a profit or loss.
What is a cashflow forecast?
A cashflow forecast details how much money a company expects to receive and pay out over a given period.
Why would you carry out cashflow forecasting?
- To understand impact of future plans.
- Keep track of overdue payments.
- Plan for times when there are cash gaps.
- Manage any surplus cash.
- Track spending.
What is the role of an auditor?
A auditor is required to check a company’s compliance, as well and the validity and reliability of a company’s financial information.
What is an escrow account?
An escrow account is a ringfenced back account owned by a third party on behalf of two other company’s. This can usually be a project bank account.
What is a project bank account?
A project bank account is a ringfenced bank account. The bank account ensures contractor’s, subcontractor’s and suppliers are paid on contractually agreed dates. There is usually a mechanism that needs to be in place for money to be released, a payment certificate for example.
What is overhead?
Overhead is the indirect costs or fixed expenses of running a business, for example:
1. Rent/Leasing office space
2. Utility bills
3. Staff salaries (accounting for example)
4. Insurance
5. Equipment
6. Marketing
What is turnover?
Turnover is your total income (gross revenue), you make over a set period.
What is a management account?
Management accounts are prepared for internal use or for a lender to evaluate if I can repay a loan. They are not audited, but are used to aid budget forecasting and business decisions.
How would you plan to manage your own business?
To manage my business financially, I would complete the following:
1. Profit and Loss Accounts
2. Cashflow forecast
3. Balance Sheets
4. Complete tax requirements; VAT and Corporation tax
5. Appoint an auditor
6. Make sure I have a profitable business
How would you carry out credit control within your business?
- Invoice in a timely manner
- Set payment terms in my T&C’s
- Avoid bad debtors
- Chase outstanding invoices
- Observe payment terms
- Carry out cashflow and P&L accounts
What is an Asset?
As asset is something a company owns.
What is a fixed asset?
A fixed asset is something a company owns and will be purchased for long term use; e.g. land or vehicles.