Accounting Principles and Procedures Flashcards
What is tax depreciation?
Where the declining value of an asset is offset against a company’s taxable profit.
The depreciation in value can be recorded as an expense in order to reduce the amount of taxable income.
This can be applied to vehicles, plant and machinery, furniture etc.
What are overheads?
The operating costs of the business that are incurred on an ongoing basis.
Overheads can be fixed or variable.
Fixed overheads can include rent or building insurance.
Variable overheads can include utility charges or other costs that fluctuate depending on the activity of the business.
What is an escrow account?
Contractual agreements that are used as financial instruments within a transaction.
The asset or currency being transferred between two primary parties is held by an intermediary third party until each of the original contracted parties have met their obligations.
Name three different types of accounting ratios and their uses:
Liquidity ratios - consider an organisation’s ability to pay off their debt obligations
Profitability ratios - assess an organisation’s ability to generate profits from its sales and shareholding equity.
Gearing ratios - compare capital within the company against its debts. The gearing is a measure of a company’s financial leverage.
Why do businesses keep company accounts?
- Record and measure a company’s profitability
- Tax calculation including taxable deductions
- Legislation requires companies to keep accurate records
- Business growth is encouraged by identifying profitable operations whilst also allowing management to minimise any loss making activities
What is financial leverage?
The concept of using borrowed funds in the form of debt to enhance business operations and increase profitability.
What are capital allowances?
They allow tax payers to gain tax relief by using their expenditure to be deducted from their taxable income.
The expenditure used to lower taxable income is only allowed within certain categories, such as:
- Plant and machinery
- Patents
- R&D costs
What is the difference between a current asset vs a fixed asset?
Current assets can normally be converted into cash within one financial year and are regarded as assets that enable the day to day operation of the business. Examples may include inventory or prepaid expenses.
Fixed assets typically cannot be converted into cash within one year. These are assets that a company owns on a long term basis. Examples include machinery, buildings, furniture.
What is the difference between a P&L account and a balance sheet?
P&L shows the incomes and expenditures of a company and the resulting profit or loss.
The balance sheet shows what a company owns (assets) and it owes (liabilities) at a given point in time.
What are the key financial statements that all companies must provide?
- Profit and loss account (P&L)
- Balance sheets
- Cash flow statements
What is a cashflow statement?
The summary of actual or anticipated ingoing and outgoing of cash in a firm over the accounting period. It is broken down into operating, investing and financing activities.
It also measures the short term ability of a firm to pay off its liabilities.
Why do chartered surveyors need to be able to interpret company accounts?
- To review their own firm’s accounts
- To assess the financial strength of prospective and current tenants
- To assess the financial strength of contractors and those tendering for contracts
What is the purpose of P&L?
- Monitor and measure profit (or loss)
- Serve as a comparison for past performance
- Assist in forecasting future performance
- Calculate tax
What is the difference between debtors and creditors?
Creditors are the firms that your firm owes money to, for example a sub-contractor.
Debtors are the firms that owe your firm money, such as a client.
What are financial statements?
Forecasts of income and expenditure used to identify potential shortfalls and surpluses.
