Accounting Principles Flashcards

1
Q

What is ‘financial statements’ often called as well?

A

‘The accounts’

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2
Q

What do ‘users’ refer to?

A

The different groups of people who may look at the accounts of a company.

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3
Q

What does being ‘on the public record’ mean?

A

Being able to go on Company’s House and download any company’s set of accounts.

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4
Q

Who are the 5 main user groups?

A
  1. Owners/Shareholders
  2. Suppliers
  3. Banks
  4. Staff
  5. Customers
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5
Q

Why might owners/shareholders be interested in looking at the accounts?

A

To work out the level of return they are receiving on their investment and whether they should keep it or sell it.

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6
Q

Why might suppliers be interested in looking at the accounts?

A

To work out if they are likely to be paid if they offer credit to a company.

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7
Q

Why might banks be interested in looking at the accounts?

A

To identify whether a company is a good credit risk for agreeing to a loan request.

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8
Q

Why might staff be interested in looking at the accounts?

A

To look at the security of their jobs and whether they are likely to receive a bonus based on the success of the company.

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9
Q

Why might customers be interested in looking at the accounts?

A

To check that a company is likely to still be trading in a year or two when the customer wants to buy again.

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10
Q

What is the importance of producing a set of accounts?

A
  • A business needs to have a system in place to record all the transactions in a meaningful and logical way.
  • The business must also be able to produce a set of accounts that will summarise all the transactions that occurred throughout the period, and the position the business is in at the end of its accounting period.
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11
Q

What are the general aims (4) of the accounting system?

A
  1. To identify how well the business has performed in the period (by calculating the profit or loss generated in the period).
  2. To identify the value of the assets and the liabilities.
  3. To help understand the cashflow positions of the company. Many businesses go bust because they do not generate enough cash to pay their bills.
  4. To communicate these things to the users of the accounts in as clear a manner as is possible.
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12
Q

What are the 4 main transaction types?

A
  • Cash sales
  • Cash expenditure
  • Credit sales
  • Credit expenditure
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13
Q

What is a ‘cash’ sale?

A

A sale that is settles immediately by the customer (this doesn’t mean it’s been settled by actual coins and notes, e.g., if you write a cheque for something you are settling it immediately so this would be a cash transactions, so would using a debit/credit card.

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14
Q

What is a ‘credit’ sale?

A

A sale where the customer is given a period of time, i.e., the credit period, before they have to pay for what they bought. This is normally 30 or 60 days.

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15
Q

Describe ‘sale’ vs ‘expenditure’

A

A sale is where we generate income by providing goods or services to a customer who will pay for it.

Expenditure is where we pay for something that we need in our business.

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16
Q

What are 3 other ways ‘sales’ is referred to as?

A

Revenue, income, turnover

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17
Q

What sort of document generally accompanies a cash transaction?

A

Receipts, till roll, cheque book stub

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18
Q

What sort of document generally accompanies a credit transaction?

A

Invoice

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19
Q

What is an invoice

A

A demand for payment at some point in the future

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20
Q

What are primary documents sometimes referred to as?

A

Source documents — they are the initial documentation which is produced when a transaction takes place

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21
Q

What does ‘BOPE’ stand for, and what is its purpose?

A

Books of Prime Entry — they are the first place we enter transactions into our accounting records

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22
Q

Name all the different BOPE (10).

A
  1. Sales day book
  2. Sales return day book
  3. Purchase day book
  4. Purchase returns day book
  5. Cash book receipts
  6. Cash book payments
  7. Discounts allowed day book
  8. Discounts received day book
  9. Journal book
  10. Petty cash book
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23
Q

Define sales day book

A

All sales made on credit (sales invoices sent to credit customers)
- On credit terms

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24
Q

Define Sales returns day book

A

To record returns of goods by customers (lists all sales credit notes issued)
- On credit terms

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25
Q

Define Purchases day book

A

All purchases made on credit (purchase invoices received from credit suppliers)
- On credit terms

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26
Q

Define Purchases returns day book

A

To record returns of goods to suppliers (lists all purchase credit notes received)
- On credit terms

27
Q

Define cash book receipts

A

This will list all receipts into the bank account so would include cheque payments made by customers or proceeds of selling assets.

28
Q

Define Cash Book Payments

A

This lists all payments out of the bank account so would include BACS payroll runs and cheques written to material suppliers or to the landlord for rent.

29
Q

Define discounts allowed day book

A

This will list the prompt payment discounts that customers have taken advantage of

30
Q

Define Discounts received day book

A

This will list all the prompt payment discounts that have been taken up from suppliers

31
Q

Define Journal book

A

This lists various transactions not initially recorded in any of the above

32
Q

Define Petty cash book

A

Records small cash transactions paid for out of the petty cash tin, e.g., the purchase of stamps

33
Q

What happens after data has been collected in the books of prime entry (BOPE)?

A

It gets summarised in the general ledger

34
Q

What is the other name for the general ledger?

A

Nominal ledger

35
Q

What does the general ledger contain?

A
  • Contains a separate record for each type of transaction the business has undertaken.
  • Will have a record of sales, a record for purchases of inventory, a record for salary costs, a record for rent, a record for amounts owed to the bank, a record of the vehicles owned.
  • Each of these records is known as an ‘account’.
36
Q

What system do we use to summarise transactions in the general ledger?

A

Double entry bookkeeping

37
Q

Define asset

A

Something that is owned by the business, e.g., property, vehicles, computers, inventory of goods, cash in the bank, amounts owed to us by the customers, etc.

38
Q

Define liability.

A

Something that is owed by the business to someone else, e.g., bank loans, overdrafts, amounts owed to suppliers of goods, unpaid tax, etc.

39
Q

Define income

A

Sales made by the business to their customers

40
Q

Define expense

A

Costs incurred by the business, e.g., the purchase of goods, salaries, utilities, etc.

41
Q

Describe the Dual Effect

A
  • The system works on the basis that every transaction affects two accounts in our records.
  • For every entry in one account there must be an equal and opposite entry in another accounts, explaining the name ‘double-entry’.
42
Q

Describe the two accounts affected in the following scenario: A business makes a cash sale to a customer of £100

A
  • Cash increases by £100 (now an asset owned by the business)
  • Sales increases by £100 (now an income for the business)
43
Q

Describe the two accounts affected in the following scenario: The business sells goods for £200 on credit

A
  • Receivables account increases by £200 (asset)
  • Sales increases by £200 (income regardless of whether it has been paid for yet—income is recorded when the goods are taken by the customer)
44
Q

Describe the two accounts affected in the following scenario: The business pays a salary of £300

A
  • Salary expenses increases by £300 (this will reduce profit for the period)
  • Cash asset has decreased by £300
45
Q

Describe the two accounts affected in the following scenario: The business receives en electricity invoice for £30

A
  • Electricity expense increases by £30 (this will reduce profit)
  • Payables account increases by £30 (liability)
46
Q

Describe the separate entity concept

A
  • Even though in many respects the business and the owner of the business (often referred to as the sole trader) are intertwined, for accounts purposes we keep them completely separate.
  • It is common that owners will put money into a business to help finance it (particularly at the start) and this is shown as an amount owed back to the owner.
47
Q

Describe the two accounts affected in the following scenario: The owner of a business pays £500 of their own money into the business bank account

A
  • Cash increases by £5000
  • Capital account increases by £5000 (liability)
48
Q

Describe the two accounts affected in the following scenario: Sole trader takes £1000 out of the business bank account

A
  • Cash account decreases by £1000
  • Drawing account increases by £1000 (reduces the amount they are owed by the business, or effectively what they owe back to the business now)
49
Q

What does ‘DEAD CLIC’ stand for?

A

Debit
Expenses
Assets
Drawings

Credit
Liabilities
Income
Capital

50
Q

What is the double entry for salary expenditure?

A

Dr Salary expenses
Cr Cash

51
Q

What is the double entry for a sole trader putting money into the business?

A

Dr Cash
Cr Capital

52
Q

What is the double entry for an electricity invoice?

A

Dr Electricity expenses
Cr Trade receivables

53
Q

What are ledger accounts mostly referred to as?

A

T accounts

54
Q

What is a narrative in a T-account?

A

The narrative tells us which account the other side of the transaction is entered on

55
Q

What are the steps when balancing off a T accounts?

A
  1. Look at both sides of the T account and identify which side has a greater value on it. Put this figure in the total box on both sides.
  2. One side of the T account won’t come to this total so we have to insert a ‘balancing figure; to make it come to the total.
56
Q

What does it mean if the balancing figure is on the Cr side?

A

It means the net figure it a Dr as we originally has more on the Dr side than on the Cr side.
By definition the BAL FIG will always sit on the side that is smaller.

57
Q

When we are balancing off ledger accounts, we show the BAL FIG as the ‘___ ___’ (or __/__) balance as this is the remaining amount at the end of the accounting period. At the start of the next accounting period this becomes the ‘___ ___’ (or__/__) balance as this is where we are staring from the next period.

A
  • Carried down
  • c/d
  • Brought down
  • b/d
58
Q

What do we call the balancing figure?

A

Balance carried down

59
Q

What is the carried down balance also known as sometimes (not BAL FIG), and sometimes shown as?

A
  • Balance carried forward (c/f)
  • Likewise, the brought down balance is also known as ‘Balance carried forward (b/f)’.
60
Q

The balances from which accounts appear in the Statement of Financial Position (SFP)?

A
  • Assets
  • Drawings
  • Liabilities
  • Capital
61
Q

What accounts are the figures that appear in the Statement of Profit and loss (SPL) taken from?

A
  • Expenses
  • Income
62
Q

What happens to expenses and income figures?

A
  • Throughout the period these figures are carried down and brought down.
  • Period end —> balances are transferred to a P&L ledger which leaves a nil balance on the Expenses and Income ledgers so they can start afresh in the following period.
63
Q

What do we write instead of ‘balance c/d’ for expense and income T accounts?

A

‘To P&L’