Accounting Principles and Procedures Flashcards
what are the contents of a set of public limited company accounts
- chairman’s statement
- independent auditors report
- income statement (profit and loss account)
- statement of financial position (balance sheet)
- corporate governance report
- remuneration report
- other statutory information
what are company accounts
a summary of a company’s financial activity over a 12 month period, typically prepared at the end of the financial year for Companies House and HMRC.
They comprise balance sheets, cash flow statements and profit and loss statements
what is a balance sheet
statement of the business’s financial position showing its assets and liabilities at a given date usually at the end of the financial year
what is included in a balance sheet
assets and liabilities
- assets - cash, property, debtors and other investments held
- liabilities - can include borrowings, overdrafts, loans, and creditors
what is the purpose of a balance sheet
to provide a snapshot of company’s finances at a given time
what is a cash flow statement
shows the flow of money in and out of a company
why is a cash flow statement important
can be used for forecasting to manage project spend, resources, and ensure liabilities are met
what is a profit and loss statement
summary of income and expenditure over a set period of time
what is included in a profit and loss statement
revenue
costs of goods sold
taxes
marketing and advertising costs
selling, general and administrative expenses
what is the purpose of profit and loss statement
used to calculate gross and net profit
what is the purpose of keeping company accounts
- UK companies, trading or dormant must submit annual financial statements to Companies House - the accounts of trading companies must be sent to the HM Revenue and Custom
- Enables companies to track money coming in and out, so they can have an understanding of whether their liabilities can be met and how this can best be achieved
- enables companies to monitor company performance, for example profit and loss
- companies can use the information to inform future business planning
- enables companies to identify any problem areas in the business
what are the International Accounting Standards (IAS)
first international accounting standards that were issued by the International Accounting Standards Committee (IASC)
- the purpose was to make it easier to compare business around the world, increase transparency and enable investors to make informed decisions about investment opportunities
what are the International Financial Reporting Standards (IFRS)
- set of international accounting standards
- provide common accounting rules which makes it easier to compare business around the world increase transparency and enable investors to make informed decisions about investment opportunities
- replaced IAS in 2001
- introduced by the International Accounting Standards Board (IASB) which replaced the International Accounting Standards Committee (IASC) in 2001
- required for companies whose securities are trading on a UK regulated market (ie public), optional for non-public companies
- UK company accounts must meet either UK GAAP or UK adopted IFRS
who adopted the UK IFRS
UK Endorsement Board (UKEB)
what are Generally Accepted Accounting Principles (GAAP)
- accounting standards which vary depending on location
- in the UK they are published by the UKs Financial Reporting Council (FRC)
- ensures that financial statements are fit for purpose and different companies can be compared fairly and effectively
How does IFRS differ to GAAP
- IFRS is globally adopted method for accounting, and used internationally
-GAAP is locally based and influenced by the different accounting boards of each country. eg GAAP is exclusively used in the UK - IFRS values property using revaluation model (fair value at current date minus depreciation)
- GAAP values property using the cost model (historic cost minus depreciation)
what is the role of the auditor?
- review company accounts to ensure validity and legality of their financial records
- confirm accounting practices are genuine and following correct and consistent principles
- can be appointed to advice on improving accounts and the financial performance of a company
- UK companies must appoint a UK registered audit firm. They need to sign the audit in behalf of the firm
what are management accounts
periodic set of financial statements, generally prepared monthly or quarterly to provide insight into the financial performance of a business
- the analysis of this information can assist managers with day t0 day and short term decision making, monitoring and forecasting
- not required by law and do not have to be filed with HMRC
Why is knowledge of accounting principles and procedures relevant to you
to be able to understand the financial health of a project/tenant/business to protect the client’ interests
what is companies house
a government agency within the Department for Business, Skills and Innovation
inspect and store information on all limited companies and limited liability partnerships registered in the UK
what is a limited company
Private company
owners assets and income are separate from the company’s assets and income.
Their liability is capped at the amount unpaid on the shares that they hold
what is limited liability partnerships
requires at least 2 members
each partners assets and income are separate from the company’s assets and income. Their liability is capped at the amount of capital which they agreed to contribute under the Member’s agreement.
what is the Companies Act 2006?
- main legislation governing company law in the UK
- aim to modernise and simplify company law
- main components include:
1. requires all UK businesses to prepare their financial statements to accounting standards set by the UK GAAP or IFRS
2. company directors can provide a service address, in order to keep their residential address off the public record
3. limited companies are not longer required to have a company secretary and can be run by one director
4. indirect shareholders have more rights including the right to sue the company’s directors if fraud or negligence is suspected
what is corporation tax
- the main tax for a limited company
- a limited company must pay corporation tax on its profits and any gains from selling assets (eg property shares)
- need to register for this tax when you set up as a limited company (within 3 months of starting trade)
Note - LLPs and sole traders pay income tax on profits and capital gains tax on any gain from the sale of assets
what is corporation tax rate
25% (profits exceeding £250k)
How do you assess a company’s accounts
- financial health check website eg Dun and Bradstreet
- ratio analysis where a company’s financial statements are analysed and ratios are used to provide an indication of the company’s performance in several key areas:
1. liquidity - the ability of the company to pay its debts (solvency) - current assets divided by current liabilities
2. profitability - how effective the company is at generating profits from sales and/or capital assets
3. return on Capital Employed - measures relative to profitability after taking into account the amount of capital used - earnings before interest and tax divided by capital employed
what is gross profit
total amount before anything is deducted
what is net profit
amount remaining after deductions/alterations
are you qualified to give your client advice on company accounts
always caveat any advice to a client on a companys financial position and recommend further advice is provided by a qualified accountant and remmened where they can find one
where can you find a qualified accountant
Institute if Chartered Accountants in England and Wales (ICAEW). In order to become chartered they have passed their Associate Chartered Accountant (ACA)
what is equity
the value that would be returned to a companys shareholders if all of the assets were liquidated and all debts were paid off
= total assets - total liabilities
Equity can be found on a companys balance sheet and is one of the most common pieced of data employed by analysts to assess a companys financial health
what are capital allowances
- regulated by the HMRC
- some or all of the value of the items can be deducted from the companys profits before paying taxes
- eligible categories include research and development and plant and machinery
- cant be used on land and buildings
