Accounting Principles Flashcards
What is included within a company’s financial accounts?
Balance Sheet
Profit and loss (income statement)
Directors Report
Cashflow Statement
Who do you need to send your company accounts to?
HMRC
Companies House
Shareholders
What is a balance sheet?
A balance sheet is a financial statement that shows a company’s current assets and current liabilities at a point in time.
What is an income statement?
An income statement (profit and loss account) details a company’s income, expenditure and taxation over an accounting period - showing their NET profit or loss as a bottom line
What is the difference between a balance sheet and an income statement?
Balance sheet shows current assets and liabilities, not profit and loss of a business > Snapshot in time
Income statement details revenue, profit, tax and losses.
Why is it important to financially vet contractors?
To see if they’re struggling financially
Check the size of the contractor
Mitigate the risk of the contractor under performing due to not being able to pay subcontractors.
How do you / have you financially vetted contractors?
Internal AtkinsRéalis credit check system
Dunn & Bradstreet report
PQQ’s & Financial Accounts
What accounting ratios are you aware of?
Liquidity Ratio
Profitability
Gearing
What does profitability tell you about a contractor?
Profitability outlines a contractor’s revenue less costs / profit, essentially showing if they are making a profit before tax.
What does liquidity tell you?
A companies abilities to pay its short-term debts and their position in terms of assets and debts / liabilities
What does gearing tell you?
Measures a company’s overall debt against equity (its value)
What is a cashflow statement?
A cash flow statement is a financial document that provides a detailed overview of the cash inflows and outflows of a business over a specific period.
What accounting principles are you aware of?
GAAP (General Accepted Accounting Principles) - A standard adopted in the UK for financial reporting
IFRS (International Financial Reporting Standards) - Set of international accounting standards stating how particular types and accounts should be reported.
How is plant treated under IFRS?
Plant Property & Equipment – an asset which is expected to be used for more than one period.
Why do chartered surveyors in your pathway need to understand financial accounts?
To assess if a contractor is in a healthy financial position
Limit risk of appointing a struggling contractor
Assessing competition
What are some ways you have analysed a contractor’s financial accounts / position?
PQQ’s, requested that the contractors tendering provide 3 years of financial accounts
If the contractor had been profitable in the last few years
Dunn & Bradstreet Credit Report
AR credit checking system
What is the limitation of a Dunn & Bradstreet Report?
Only takes into account last 3 years
Does not account for future performance or order books for example
What type of information would you normally request in a PQQ?
Accounting Ratios
Financial information (last 3 years of financial documents)
How would you calculate profitability?
Revenue - Costs / Revenue * 100 = Profitability
What could be some signs of insolvency in a credit check / companies accounts?
Negative current ratio (liquidity)
Company making a loss over a period
Poor cashflow
What are you likely to find on a balance sheet?
Non-current assets (property, plant and equipment)
Current Assets (cash)
Equity (share capital)
Non-current liabilities (bank loans)
Current Liabilities (wages)
Are profit and loss accounts current?
No, they retrospective over a duration, usually the company’s accounting period
What are the elements of an income statement?
Revenues – fees that were earned during the period shown in the heading (e.g. contract income of a construction company)
Gains – Net amount related to transactions that are not considered part of the company’s main operations (gains from investing)
Expenses – costs incurred by a company in performing its main operations
Losses – net amount related to transitions that are not considered part of a company’s main operating activities
What are cashflow statements?
Explains how a company’s cash and cash equivalents have changed during a specified period
What procedures can you implement to improve cashflow?
Study cashflow patterns
Maintain a cashflow forecast
Negotiate payment terms
Cut unnecessary spending
What is the difference between revenue expenditure and capital expenditure?
Revenue = An amount expensed immediately
Capital = Costs associated with a one-off acquisition
What is an audit?
An audit is a review completed by an external auditor that reviews and qualifies a companies accounts and checks its accuracy
Who is exempt from being audited?
Small Companies
Less than £10.2m in turnover
Total Assets less than £5m
Less than 50 employees
What is the basic accounting equation?
Assets = Liabilities + Equity
What is the accruals concept?
Accrual accounting is when a company may record revenue before receiving the payment for goods or services.
What is the “going-concern” concept?
oing concern is an accounting term for a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future
Who needs to register with companies house?
All limited companies must register with companies house
Sole traders and partnerships do not need to register with companies house
What is taxation?
The obligation to pay compulsory levies by the government, to fund public spending
If you were registering a company tomorrow, what taxes would you need to pay and be aware of?
VAT if applicable
Corporation Tax
National Insurance
Income Tax
What is the construction industry scheme?
The construction industry scheme is a scheme created by HMRC to collect tax from contractors or sub-contractors
Designed to minimise tax evasion in the construction industry
How does this relate to your projects / contracts / clients?
For tax purposes, my clients are registered as contractors within each main contract.
Contractors deduct tax from payments to sub-contractors and instead are paid directly to HMRC.
What is corporation tax?
Tax owed by every company based on their profit
What is the current rate of corporation tax?
19% for small businesses = less than £50k
25% for other business = Over £250k
Marginal relief between the two
What legislation do you need to follow if you were setting up your own company?
Companies Act 2006
H&S at work 1974
Bribery Act 2010
Equality Act 2010
GDPR 2018
UK Employment Law
What must companies provide every year in accordance with the companies act 2006?
The Directors must prepare accounts for the company for its financial years
Basically, company annual accounts submitted to Companies House and HMRC
Why was the Companies Act 2006 introduced?
To modernise and simplify corporate law
to codify common law
To improve shareholder rights
To simplify administration process
What is the difference between management accounts & financial accounts?
Management Accounts - Used internally by the managers of the business, to obtain funding, loans or investment (not mandatory)
Financial Accounts - Accounts required by law and audited by a Chartered Accountant (mandatory)
Explain the principles behind capital allowances
Capital allowances = A tax incentive to invest in plant and machinery
The government incentive reduced taxable profits by claiming tax relief on certain types of Capex (plant and machinery) to reduce taxable trading profits.
The annual investment allowance (AIA) gives a deduction of 100% of the cost of “qualifying expenditure” from your business income up to an annual limit. The AIA is currently £1m per accounting period.
What is meant by depreciation in relation to an asset?
The term depreciation refers to an accounting method used to allocate the cost of a tangible asset over its useful life
E.g. if an excavator has a useful life of 10 years and it costs £100k, then a £10k expense will appear on the company’s income statement each year rather than the full £100k purchase.
What is the current annual limit for Capital Allowances?
The annual investment allowance is currently £1m. Increased in a company’s first year of trading
What is VAT?
Value added tax – applies to the sale of most goods and services
Give me some examples of goods or services not applicable to VAT?
Public Education & Training
Healthcare and medical treatments
Charities
What is the rate of VAT?
20%
How is VAT dealt with in a company’s accounts?
Not included within P&L – shown as a liability on the balance sheet
When must a company register for VAT?
When they have a turnover of £90,000, increased from £85k in April 2024
Where could you look to for information on a company’s accounts?
Companies House
What is a sinking fund?
Money set aside to pay off a debt or bond
What is an escrow account and when might it be used?
Holding accounts for construction project funds
Paid upfront and held in the account to be drawn down from
