Accounting principles and procedures Flashcards
What is the difference between a balance sheet, profit and loss and a cash flow statement?
Balance Sheet – assets & liabilities (specific period)
- Statement of financial position
Profit & loss – income & expenditure (annual basis)
- Income statement
Cash flow – cash in and out (specific date)
- Net cash flow
What are assets and liabilities
Assets – something of value your company owns
Liability – debts owed by your company/money owed to others.
What is an example of an asset/liability?
Asset – property, cash, investments
Liability – borrowings, creditors, loans
What is the difference between finance and management accounts?
Finance accounts have usually been audited by a chartered accountant and are done on an annual basis.
Management accounts can be seen as a specific period of time, aren’t audited and are for internal uses.
What is GAAP?
General Accepted Accounting Principles - provide guidance on the way financial reports are set and is the financial reporting framework accepted by some companies in the UK
What is a Dun & Bradsheet Report?
Provides a rating to give a quick and clear indication of the credit-worthiness of an organisation. Helps to identify potential risks and opportunities for growth.
How do you interpret a D&B Rating?
The first part is the Financial Strength (IE 5A)
The second part is the risk indicator (1)
5A1 is the best covenant which shows the firms annual turnover is greater than £35m and their risk indicator is low.
Profits test?
net profit for business must be 3 times the rent for 3 consecutive years or the net asset value of business must be 5 times the rent.
- What does a profit and loss statement show?
A P&L statement, more commonly labeled “statement of income” or “income statement,” is a financial statement that summarizes the revenues, costs, and expenses incurred during a specific period, usually a fiscal year or quarter.
- What is balance sheet?
The balance sheet displays the company’s total assets and how the assets are financed, either through either debt or equity. It can also be referred to as a statement of net worth or a statement of financial position. The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity.
- What is the difference between a management and statutory account?
management for internal purposes, business planning, etc. statutory is for external, which are signed off by auditors
- What is IFRS 13?
IFRS 13 defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements.
what is the role of an auditor
The auditor’s objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes the auditor’s opinion
- What are the key accounting principles?
Accrual Principle
Accounting’s accrual principle recognises income and costs when they are generated or spent, regardless of when cash is exchanged. It guarantees that a company’s financial situation and performance are appropriately reflected in its financial statements at any given moment.
Conservatism Principle
The conservatism principle directs accountants to be cautious in recognising potential gains, only recognising them when realised while recognising potential losses as soon as they are probable. This principle safeguards against over-optimistic reporting, promoting prudence in financial statements.
Cost Principle
Assets are first documented at their historical cost under the cost principle, assuring financial reporting dependability and impartiality. Adjustments for depreciation or impairment may occur in the future, but the concept prioritises actual transaction values.
Revenue Recognition Principle
This principle dictates that revenue should be recognised when it is both earned and realisable. It ensures that revenue is not prematurely recognised and reflects the actual value a company has generated.
Economic Entity Principle
The economic entity principle distinguishes between personal and business finances. It treats the firm as a separate accounting entity, limiting the mixing of personal and corporate assets and liabilities and improving financial transparency.
Consistency Principle
The consistency principle encourages uniformity in accounting methods from one period to the next. It promotes comparability of financial statements over time, allowing stakeholders to analyse trends and make informed decisions.
Objectivity Principle
According to the objectivity principle, financial information must be reliable and free of prejudice. It emphasises the need to rely on objective evidence rather than human judgements to ensure the trustworthiness of financial data.
Going Concern Principle
The going concern principle assumes that a company will continue to operate indefinitely unless there is substantial evidence to the contrary. It allows for the valuation of assets and liabilities as if the business will continue to operate, fostering realistic financial reporting.
