Accounting Principles and Procedures

Question 1

What is a balance sheet?

Answer 1

A balance sheet is a statement showing a business’ financial position at a point in time. It shows a business’s assets and liabilities at a given date, usually at the end of a financial year.

Question 2

What is an asset?

Answer 2

Things you have a benefit from or hold value.

Question 3

What are the types of asset?

Answer 3

Current assets - are assets expect to be used or sold within one year.

Non-current asset - asset or property that is not easily converted to cash within one year. Non fixed items such as plant and machinery.

Question 4

What is a liability?

Answer 4

What a business owes. Due to past transactions eg wages and loans

Question 5

What is equity?

Answer 5

Equity is the amount returned to shareholders if all assets were to be liquidated and all the company’s debt paid off.

Question 6

What is a profit and loss statement?

Answer 6

A summary of revenue and expenditure transactions over a given period, typically a year. They are not current, but retrospective.

Question 7

What is revenue?

Answer 7

Business income. Money from sales or from providing a service.

Question 8

What are expenses?

Answer 8

Costs a company’s incurs to generate revenue.

Question 9

What is a cash flow statement?

Answer 9

Shows the actual receipts and expenditures including vat.
Shows if contractors are paying on time. Struggling companies should check their cash flow statement more often than healthier companies.

Question 10

What is GAAP?

Answer 10

Generally Accepted Accounting Principles is a UK only accounting standard. Based upon a set of 10 accounting principles and procedures that accounts must follow when they compile their financial statements. GAAP is the most commonly applied standard in the UK as it is more straightforward and more flexible than under IFRS.

Question 11

What are the 10 accounting principles and procedures under UK GAAP?

Answer 11

1. Regularity
2. Consistency
3. Sincerity with an accurate representation of the company’s financial situation.
4. The permanence of methods.
5. No expectation of compensation.
6. Prudence with semblance of speculation.
7. Continuity.
8. Dividing entries across appropriate periods of time
9. Full disclosure in all financial reporting
10. Good faith and honesty in all transactions.

Question 12

What are international accounting standards? (IAS)

Answer 12

Published between 1983 and 2001, issued by the International Accounting Standards Commitee (IASC). IFRS are replacing IAS.

Question 13

What are the IFRS?

Answer 13

The International Financial Reporting Standards are a set of international accounting standards, which state how particular types of transactions and events should be reported in financial statements. Creates a common accounting language.

Question 14

What are some differences between GAAP and IFRS

Answer 14

GAAP is principle based, less complex and more straightforward.
IFRS is rule based and more detailed and rigid.
IFRS is international and GAAP is UK only.

Question 15

What is an auditor?

Answer 15

An auditor performs internal financial and risk management audits. Undertake external financial audits of commercial and public sector organisations. They ensure policies, regulations, and standards are followed.

Question 16

What can the responsibilities of an auditor include?

Answer 16

• collating, checking and analysing spreadsheet data
• examining company accounts and financial control systems
• gauging levels of financial risk within organisations
• checking financial reports and records are accurate and reliable
• ensuring that assets are safeguarded
• identifying if and where processes are not working as they should and advising on changes to be made.
• preparing reports, commentaries and financial statements
• liasing with managerial staff and presenting findings and recommendations
• ensuring procedures, policies, legislation and regulations are correctly followed and complied with
• undertaking reviews of wages.

Question 17

What companies require auditing?

Answer 17

Companies with a turnover of more than £6.5million, public companies and companies providing a financial service.

Question 18

What types of company accounts are there?

Answer 18

Financial and management accounts. Financial accounts are required by law under the Companies Act 2006. They are prepared annually in a fixed format following a specific accounting convention (GAAP or IFRS). A qualified accountant should prepar these.
Management accounts are for internal use only and far more flexible. They are for making business decisions and internal record keeping and can contain estimates and predictions. No rules apply. MA can also focus on specific areas of a business, FA will be business as a whole.

Question 19

How long should accounting records be kept for?

Answer 19

Companies House state that private companies should keep their accounting records for 3 years and PLC’s for 6.

Question 20

What companies can be audited?

Answer 20

Under the Companies Act 2006, a company can be audited by an accountant to confirm that there are no material misstatements. All PLCs must have their accounts audited, some smaller private companies may claim an audit exemption based on their size.

Question 21

What are Companies House accounting requirements?

Answer 21

All UK private companies, LLPs and PLCs must comply with the Companies Act 2006, including filing annual accounts with Companies House. A set of company accounts should include:
- profit and loss statements
- balance sheet
- notes to accounts
Depending on the size of the company, a directors report and auditors reports may be required.
Larger companies will be required to provide more complex accounts than mirco-entities, they can prepare abridged accounts. Accounts must be filed within nine months of the year end for private companies and 6 months for PLCs. Submitting late accounts is a criminal offence.

Question 22

What is the CIS tax?

Answer 22

Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractors payments and pass it to HMRC.

Question 23

What is insolvency?

Answer 23

Insolvency is the state of being able to pay money that is owed.

Question 24

What are the types of insolvency?

Answer 24

Cash flow insolvency: a compnay cannot meet demands for payment as and when they are due

Balance sheet insolvency: a company’s assets is less than the amount of its liabilities.

Question 25

What is the difference between an balance sheet and a profit and loss statement?

Answer 25

A balance sheet reports the assets, liabilities and shareholder equity at a specific point in time

A P&L statement summarizes a company’s revenues, costs, and expense over a period of time.

Question 26

Why should you keep company accounts?

Answer 26

To keep track of money coming and money going out

To comply with Company’s Act 2006

So they can monitor profit and loss

To use when business planning

Question 27

What is meant by the terms Gross and Net?

Answer 27

Gross profit is revenue minus the cost of producing the good / service

Net profit is revenue minus the expenses

Question 28

What are some signs of contractor insolvency?

Answer 28

Overvaluing Interim Valuations.

Dissatisfied workforce.

Asking for upfront payment.

Poor credit score - Credit checks

Question 29

What are some types of audits?

Answer 29

Financial Audit
Forensic Auditing
Tax Auditing
Operational Audit
Compliance Audits

Question 30

What are some IAS that affect your industry?

Answer 30

IAS 1 Presentation of Financial Statements,
IAS 11 Construction Contracts (superseded by IFRS 15)
IAS 16 Property, Plant and Equipment,
IAS 40 Investment Property

Question 31

What is gross profit?

Answer 31

Turnover minus the cost of sales eg wages relating to a specific service.

Question 32

What is net profit margin?

Answer 32

Express as a percentage, net profit divided by revenue, multiplied by one hundred. Higher the profit margin the better.