Accounting principles and procedures Flashcards
What is meant by a Balance Sheet?
It is a summary of a person’s or organisation’s balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year.
A balance sheet is often described as a snapshot of a company’s financial condition. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. (Asset – Liability = Equity).
What is meant by ‘assets’ and ‘liabilities’?
Assets - Are what the company OWN:
• Fixed asset - Cars, buildings, plant, equipment
• Current assets - Cash, stock, money you are owed
by others etc.
Liabilities - Are what the company OWE:
• These include things such as loans, mortgages,
outstanding invoices and other debt.
What is the Profit & Loss Account?
A report of the company’s profit on the sale of their goods or the provision of their service over
a trading period, normally one year.
What is Cash Flow?
It refers to the movement of cash into or out of a business. It is usually measured during a specified, finite period of time. It can refer to actual past flows, or to projected future flows.
What is a Cash Flow Forecast?
A document that details a company’s expected income and expenditure over a period of time (usually a fiscal year). A cash flow forecast allows a business to;
• Plan expenditure.
• Anticipate times of financial difficulty.
• Secure additional finance before the company
develops negative working capital.
What is income tax?
It is tax you pay on your income, such as;
• Money you earn from employment.
• Profits you make if you’re self-employed.
• Most pensions.
• Benefits you get from your job.
Most people in the UK get a Personal Allowance of tax-free income (£12,570). This is the amount of income you can have before you pay tax.
What are the three rates of VAT?
• Standard (20%)
• Reduced (5%) - Energy saving materials in
dwellings i.e. insulation, solar
panels
• Zero (0%)
• Exempt - Commercial land & buildings, Insurance
Out of UK VAT System Scope – Charitable Donations
What is meant by Insolvency?
The inability to pay one’s debts as they fall due.
Business insolvency is defined in two different ways:
• Cash flow insolvency - Unable to pay debts as
they fall due.
• Balance sheet insolvency - Having negative net
assets – in other words, liabilities exceed assets.
What is Bankruptcy?
It is a legally declared inability or impairment of ability of an individual or organisation to pay its creditors.
•Involuntary Bankruptcy - Creditors may file a
bankruptcy petition against a debtor.
•Voluntary Bankruptcy - Initiated by the debtor.
What is the consequence of Insolvency?
The consequences of insolvency will mean that the business will go into liquidation and stop trading or go into administration and be sold (maybe to a new owner). In some cases the outcome may be a company voluntary arrangement.
What are the responsibilities of a VAT registered company?
From your effective date of registration you must:
• Charge the right amount of VAT
• Pay any VAT due to HMRC
• Submit VAT Returns (quarterly)
• Keep VAT records and a VAT account
You must register your business for VAT with HM Revenue and Customs (HMRC) if its VAT taxable turnover is more than £85,000.
Who pays Corporation Tax?
Corporation tax is payable by all UK limited companies. You must pay Corporation Tax on profits from doing business as:
• A limited company
• Any foreign company with a UK branch or office
• A club, co-operative or other unincorporated
association, eg a community group or sports club
Taxable profits for Corporation Tax include the money your company or association makes from:
• Doing business (‘trading profits’)
• Investments
• Selling assets for more than they cost (‘chargeable
gains’)
What is Capital Gains Tax?
Tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.
It’s the gain you make that’s taxed, not the amount of money you receive.
Some assets are tax-free. You also do not have to pay Capital Gains Tax if all your gains in a year are under your tax-free allowance.
