Accounting Principles and Procedures Flashcards
What are overheads?
The terms overheads means the operating cost of the business that are incurred on an ongoing basis.
Overheads can be both fixed or variable.
Example of fixed overheads could take the form of rent on office buildings or building insurance costs that do not change each month
Whereas as variable overheads tend to fluctuate depending on the activity of the business for example delivery or utility charges.
What is an escrow account?
A seperate account owned by a third party. Money is held within the account on behalf of two other parties.
The momney is usually held until the parties have met their contractual obligations allowing the money to then be released.
Mechanisms must be in place to allow for the release of funds.
Name the three different types of accounting ratios and explain what they show.
Liquidity ratios – consider an organisations ability to pay their debt obligations and assess its margin of safety by looking at a number of metrics including their operating cash against short term debts.
Profitability ratios – assess an organisations ability to generate profits from its sales operations and shareholding equity. The ratioindicates how efficiently a company is in generating its profit.
Gearing ratios – compare capital within the company against its debts The gearing is a measure of companies financial leverage and sets out what proportion of the firms activities are funded by shareholders vs its creditor funds.
Why does a business keep company accounts?
Record and measure a companies profitability
Tax calculation including tax calculating 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?
Financial leverage is the concept of using borrowed funds in the form of debt to enhance business operations and increase the companies profitability and rates of return.
In the event that the rate of return invested via borrowed funds is higher that the interest on those funds then more profit can be generated
What are capital allowances?
Capital allowances allow tax payers to gain tax relief by using their expenditure to be deducted from their taxable income.
What is the difference between a current asset vs. a fixed asset?
Current assetscan normally be converted into cash within one financial year and are regarded as assets that allow day to day operation of the business. Examples may include money owed to the company following sales of its products or services, inventory and prepaid expenses.
Fixed assets typically cannot be converted into cash within one year. These kind of assets are recorded on a companies balance sheet as fixed assets the company owns on a long term basis. Examples include vehicles, office furniture, machinery, buildings and land.
Explain your understanding of the term tax depreciation?
The depreciation in value of an asset can be recorded as an expense in order to reduce the amount of taxable income.
This can be applied on things such as plant, tools, vehicles, computers, furniture and buildings.
What are the three key finanical statements?
Balance sheet.
Income/Profit & Loss Statement.
Cashflow Statement.
What is a balance sheet?
It lists a company’s assets, liabilities, and equity. A balance sheet is a financial statement that summarises a business’s value at any given point in time.
This information helps an analyst assess a company’s ability to pay for its near-term operating needs, meet future debt obligations, and make distributions to owners.
What is a profit and loss statement?
A profit and loss statement is a financial report that shows how much a business has spent and earned over a financial period.
It also shows whether you’ve made a profit or a loss over that time.
What is a cash flow statement?
A cash flow statement is the summary of the actual or anticipated ingoing of cash in a firm over the accounting period.
It measures the short term ability of a firm to pay off its bills.
why is cash flow important to a business?
Cash flow is essential for a business’s success because it’s the lifeblood of a company, keeping it running smoothly and enabling it to grow.
A healthy cashflow means a company can meet expenses, avoid debt and have enough money to make a profit.
What does a balance sheet tell you?
It tells you how much the company owns (assets) and owes (liabilities).
What is the difference between a profit and loss sheet and a balance sheet ?
The profit and loss account shows the incomes and expenditures of a company and the resulting profit and loss.
A balance sheet shows what a company owns (its assests) and what it owes (is liabilities) as any given point in time.
