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?
Escrow accounts are contractual agreements that are used as financial instruments within a transaction.
The asset or currency being transferred between two primary parties is held by an intermediary third party.
The currency being exchanged in held securely by the third party until each of the 2 parties have met their contractual obligations allowing the money to then be transferred.
This is often used by mortgage lenders when completing on the buying or selling of the real estate being exchanged.
Name the three different types of accounting ratios?
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.
The expenditure used to lower taxable income is only allowed within certain categories for example:
Plant & Machinery
Integral parts of Structures & Buildings (lifts, escalators etc)
Research & Development costs
Patents
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?
Tax depreciation is where the declining value of an asset is offset against a companies taxable profit.
The depreciation in value 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?
A balance sheet is a financial statement that summarises a business’s financial position at a specific point in time. It lists a company’s assets, liabilities, and equity.
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 abusiness has spent and earned over a specified time.
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 a financial statement that shows how cash entered and exited a company during an accounting period.
They provide insights into a company’s financial health and operational efficiency.
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 is the statement of income and expenses which shows the net profit and loss for the particular period.
Balance sheet is the statement of assets, liabilities and capital which showing the actual financial position of an entity at a certain point in time.
