Accounting principles and procedures Flashcards
What is accounting?
It is the process of recording financial transactions related to a business.
Name some common universal accounting standards?
- International Accounting Standards.
- UK Generally Accepted Accounting Standards (UK GAAP).
- US Generally Accepted Accounting Standards (US GAAP).
What is the purpose of having standardised accounting principles?
To communicate economic information in a language that is understood across various businesses.
What is the difference between IAS and UK GAAP?
UK GAAP:
- Flexibility - less disclosure under FRS102 which subsequently reduces cost and time when preparing financial statements.
- Leases - classified as either finance or an operating lease even if all risks and rewards and transferred to the owner.
- Intangible assets - no more than 10 years.
- Property - choice to either capitalise or expense the borrowing costs related to acquiring or building property at fair value.
IAS:
- Flexibility - no reduced disclosures which subsequently increases cost and time when preparing financial statements which can be problematic for small companies.
- Leases - all leases are classed as assets and liabilities if lease is more than 12 months.
- Intangible assets - life is indefinite.
- Property - costs are always capitalised though there is a choice of holding at either depreciated cost or fair value.
What are the three types of financial statement one may come across relating to a company?
- Profit & loss account.
- Balance sheet.
- Cashflow statement.
What is an asset and a liability?
- An asset is something a company owns e.g. property, branding, furniture, machinery, IT equipment and etc.
- A liability is something a company owes e.g. wages, loans, operating costs and etc.
What is the difference between financial and management accounts?
- A financial account reports on a companies income and outflow and is issued to shareholders, regulators, tax authorities.
- A management account is prepared internally to enable executives to make decisions for the future of the company.
What is understood by Generally Accepted Accounting Principles (GAAP)?
It is a standardised set of accounting principles that is used to communicate financial information that is understood across various businesses.
How do companies know which reporting framework to comply with?
They comply with the framework that is mandated in their jurisdiction e.g. GAAP or IFRS or both depending on the companies size, status and legal structure.
Which reporting framework do public limited companies have to comply with?
This is dependent on whether the company is listed on the stock exchange. In the UK, companies that are listed with the UK stock exchange can adopt either UK GAAP or IFRS, as for the US, they must follow the SEC.
What is contained within a management account?
- Profit and loss statement.
- Balance sheet.
- Cashflow statement.
What is contained within a financial/company account?
- Profit and loss statement/account.
- Balance sheet.
- Cashflow statement.
- Director’s report.
What is a profit and loss statement/account?
It is a summary of a business’s income and expenditure. Usually prepared on an annual basis.
- Income is the money coming in through the business activities such as services provided, products sold and etc.
- Expenditure is the money going out to perform business activities such as wages, loans, travel and etc.
What is a balance sheet?
Provides a view of a business’s financial position, i.e. assets = equity + liabilities, on a given date.
- Assets - is what a company owns e.g. property, branding, goodwill and etc.
- Liabilities - is what a business owes e.g. wages, loans and etc.
- Equity - shares issued by a company that represent ownership in a company.
What is a cashflow statement?
It is a compilation of the balance sheet and P&L account to show actual receipts and expenditure including VAT.
