Accounting principles and procedures Flashcards
Why are keeping accounts important for a business?
Accurate financial record keeping will be crucial to your business for the following reasons:
- To provide financial data that help company operate more efficiently, and increase company profitability.
- To identify all your business assets, liabilities, income and expenses. This information can then be used to compare with sector’s averages and highlight the company strengths and weaknesses.
- Good records are essential for the preparation of tax calculation,
What headings would you expect to see in a set of accounts?
Annual accounts should include:
- a profit and loss account (Revenue, Expenses, Profit/Loss);
- a balance sheet (assets, Liabilities, Owners Equity)
- notes explaining the accounts;
- a director’s report; and
- an auditor’s report.
How often are accounts expected to be lodged and where?
- Every year, even if your company is non-trading or dormant, you must file annual accounts with Companies House.
- This can be at any time of the year.
When assessing the financial strength of a company, what are
you actually looking for to ensure they have suitable
requirements?
1. Analyze the Balance Sheet
The balance sheet is a statement that shows a company’s financial position at a specific point in time. It provides a snapshot of its assets, liabilities, and owners’ equity.
- you can measure a company’s ability to meet its short term obligation by calculation the Liquidity ratio. For example current ratio= Current assets/current liability)
2. Analyze the Income Statement
The income statement shows a company’s financial position and performance over a period by looking at revenue, expenses, and profits earned. It can be created for any period using a trial balance of transactions from any two points in time.
- How much revenue is growing over certain accounting periods
- The gross profit margin for goods sold
- What percentage of revenue results in net profit after all expenses
3. Analyze the Cash Flow Statement
The cash flow statement provides detailed insights into how a company used its cash during an accounting period. It shows the sources of cash flow and different areas where money was spent, categorized into operations, investing, and financing activities. Finally, it reconciles the beginning and ending cash balance over the period.
- The liquidity situation of the company
- The company’s sources of cash
4. Financial Ratio Analysis
- Gross profit margin: The percentage of profit the company generates after direct cost of sales expenses have been deducted from the revenue.
- Current ratio: The company’s ability to meet short-term obligations of less than one year
- Return on equity (ROE): The company’s ability to use equity investments to earn profit
- Return on assets (ROA): The company’s ability to manage and use its assets to earn profit
What is a balance sheet/ profit and loss statement?
The balance sheet is a statement that shows a company’s financial position at a specific point in time. It provides a snapshot of its assets, liabilities, and owners’ equity.
The income statement (Profit & Loss) shows a company’s financial position and performance over a period by looking at revenue, expenses, and profits earned. It can be created for any period using a trial balance of transactions from any two points in time.
What are the key accounting concepts and procedures?
- Business identity – A business should be treated separately from the owner(s) as far as their transactions are concerned.
- Going concern – Financial statements are prepared on the assumption that the business will remain in operation in future periods.
- Monetary period – Only business transactions that can be expressed in monetary units are recorded in accounting, through records of other types of transactions may be kept separately as a memorandum.
- Accounting period – Each business chooses an accounting period in order to complete a cycle of accounting process. This may be monthly, quarterly or annually – following a calendar or fiscal year.
- Accrual – under accrual basis accounting, income is recorded when earned and expenses are recorded when incurred, regardless of the time the cash is received/ withdrawn.
What are the differences between balance sheet, profit and lost and cash flow statements and what are they for?
- Balance sheet - reports a company’s assets (resources that company controls) , liabilities (obligations to Lenders and Debtors) and shareholders’ equity (interest in net assets of a company) at a specific point in time. Provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.
- Profit and loss (Income statement) - summarizes the revenues, expenses and profit/loss incurred during a specified period, usually a fiscal quarter or year. Provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both.
- Cash flow - The statement of cash flows provides information about the changes in cash and cash equivalents of an entity for a reporting period (net cash flow). This statement shows separately changes from each business activity:
- Cash Flow from Operations (CFO),
- Cash Flow from Investing (CFI),
- Cash Flow from Financing (CFF).
What is the role of auditor?
- Auditor is responsible for checking if the financial statements comply with the adopted accounting principles and examine the company’s accounting control system.
- They confirm reported values and identify any material errors in the financial statements.
- An auditor is a person authorized to review and verify the accuracy of financial records and ensure that companies comply with tax laws. They protect businesses from fraud, point out discrepancies in accounting methods and, on occasion, work on a consultancy basis, helping organizations to spot ways to boost operational efficiency. Auditors work in various capacities within different industries.
What are the types of audit?
- Internal
- External
- Financial - the auditor analyses the fairness and accuracy of a business’s financial statements.
- Operational - An operational audit analyzes your company’s goals, planning processes, procedures, and operation results.
- Compliance - A compliance audit examines your business’s policies and procedures to see if they comply with internal or external standards.
- Information system - Information systems audits mostly impact software and IT companies. Business owners use information system audits to detect issues relating to software development, data processing, and computer systems
- Payroll - A payroll audit examines your business’s payroll processes to ensure they are accurate. When conducting payroll audits, look at different payroll factors, such as pay rates, wages, tax withholdings, and employee information.
- Pay - Pay audits allow you to identify pay discrepancies among your employees. A pay audit can help you spot unequal pay at your company. During a pay audit, analyze things like disparities due to race, religion, age, and gender.
What are accounting framework?
- An accounting framework is a published set of criteria that is used to measure, recognize, present, and disclose the information appearing in financial statements.
- The most commonly-used accounting frameworks are generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).
What is Mace Internal Audit procedure?
All internal audits shall be undertaken in accordance with the requirements set out in BS: EN: ISO 19011 - Guidelines for auditing management systems.
- Audit Preparation and Notification ,
- Conduct Audit
- Audit reporting
- Audit Follow up and close out – evaluation of actions taken, escalation – correction action should be fixed and nonconformity actions should be logged.
What is the financial statement?
- Financial statements present the financial information of the business and allow managers, regulators and outside analysts to make more informed decisions about the economic positions of the business.
- The main financial statements are balance sheet, profit and loss (income statement) and cash flow statement.
What statutory accounting standards need to be met?
Your statutory accounts must meet either:
- International Financial Reporting Standards
- New UK Generally Accepted Accounting Practice
What is the difference between a Sole Trader, Partnership, Limited, and a LLP?
- Sole Trader
A person who is the exclusive owner of a business - Partnership
A business organization in which two or more individuals manage and operate the business - Limited
In a limited company, the shareholders’ liability is limited to the capital they originally invested - Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities
What are ‘Dun and Bradstreet’ reports?
- DandB reports provide scores and ratings to help identify organisations that are likely to fail or pay late
- Provides a commercial credit score
