Accounting Principles and Procedures Flashcards
Why should you keep accounts?
-To keep track of money coming and money going out so they know they can pay their bills and suppliers etc.
-To monitor profit and loss and company performance
-Use the information for future business planning
-Use the information to highlight any problem areas so they can be investigated and solved
-So they can submit annual financial statements to Companies House
-In accordance with Company’s Act limited companies must provide their year-end accounts in accordance with a legal format.
What is the difference between Management and Company accounts?
Management accounts are used internally by the managers of the business
Financial accounts are company accounts required by law and audited by a Chartered Accountant.
What is meant by the terms Gross and Net?
In salary terms, Gross is the total salary and net is salary minus tax and all other deductions (the net cannot get any lower).
What is a balance sheet and what does it show you?
A Financial statement of the Company’s assets, liabilities and equity at a point in time.
It tells you how much the owns (assets) and owes (liabilities).
What is a profit and loss account?
A financial statement comparing the income (revenue) and outgoings (expenditure) with adjustments for any liabilities etc. to identify the profit or loss a company has made over a specific period.
What is a cashflow statement?
-Cash flow shows the actual receipts and expenditure and includes VAT.
-Reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers or employees.
-Struggling companies should review cash flow daily.
-Healthier companies should review cash flow weekly or monthly.
What is meant by depreciation in relation to an asset?
Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.
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, entitled to keep all profits after tax has been paid but liable for all losses (unlimited liability).
-Partnership
A business organization in which two or more individuals manage and operate the business. Both owners are equally and personally liable for the debts from the business.
-Limited
In a limited company, the shareholders’ liability is limited to the capital they originally invested. If such company becomes insolvent, the shareholders personal assets remain protected. Shares in a private limited company are not offered to the general public (distinguishing it from a public limited company - plc.)
-Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore exhibits elements of partnerships and corporations. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence.
Why do chartered surveyors need to understand and be able to interpret company accounts?
Understanding and interpreting company accounts is essential in my role to advise on property-related decisions that are impacted by a company’s financial health.
As an example, we are currently instructed to sell the share capital of a Ltd company. Their only asset is the freehold of a dairy farm, and they are structuring the sale in this way for tax efficiency purposes. As part of this, it is imperative that I can interpret the company accounts to check for any liabilities/debtors.
Are profit and loss accounts current?
No, they are retrospective.
What happens if a company’s liabilities are greater than its assets?
There is a likelihood the company will go into administration.
What are Capital Allowances?
A sum of money, that can be deducted from a company’s overall tax corporate or income tax on its profits. Calculated based off the purchase of specific items.
What is Cash Flow?
The incomings and outgoings of cash within a business.
Who requires auditing?
-Companies with a turnover of more than £6,500,000.00
-Public Companies.
-Companies providing a financial service, such as insurance brokers.
What are some types of financial ratio analysis?
Current Ratio Analysis.
An examination of a companies liquidity, comparing company assets against company liabilities.
Debt Ratio Analysis.
An examination of a companies debts, comparing assets to debts.
