Accounting principles and procedures (L1) Flashcards
What are financial accounts?
These are required by law. All private and public limited companies must file annual accounts with Companies House in line with the requirements of the Companies Act 2006.
What are the key financial statements that all companies must provide?
- Profit and loss statement
- Balance sheet
- Cash flow statement
What are management accounts?
Management accounts are for internal use and are often produced monthly to inform decision-making and business planning.
What is a balance sheet?
A balance sheet shows a company’s assets, liabilities, and equity at a specific point in time. It shows what a company owns (Asset) and what it owes (Liability).
As the name suggests, it should always balance such that the assets equal liabilities and shareholder’s equity.
What are the three things found on a balance sheet?
- Assets (current and non-current)
- Liabilities (current and non-current)
- Shareholder Equity
What is meant by current and non-current assets and liabilities?
Current means something the business expects to convert into cash (Assets) or something that is due to a debtor (liabilities) within a year.
Non-current are long-term investments (Assets) or obligations (Liabilities) that are not expected to come to fruition in the short term.
What is an asset?
Something a company owns
Give me an example of a current asset
Inventory
Give me an example of a non-current asset
Property
What is a liability?
Something a company owes
Give me an example of a current liability
Accounts payable
What is a non-current liability?
Pensions
What is shareholder equity?
Shareholder equity represents the net value of a company, meaning the amount that would be returned to shareholders if all the company’s assets were liquidated and all its debts repaid.
What is a profit and loss statement?
It is a financial statement that shows the income and expenditure of the company over a specific period (usually a fiscal year) culminating in the net profit or loss made in that period.
It can be used to calculate the company’s profit margin percentage and it’s ability to convert revenue into profit.
What does top line mean on a profit and loss statement?
The top line refers to a company’s revenue.
It only indicates how effective a company is at generating revenue and does not take into consideration operating efficiencies which can impact on the bottom line.
What does bottom line mean on a profit and loss statement?
The bottom line refers to a company’s profit having deducted the cost of doing business from the top line.
It shows how efficient a company is managing its operating costs.
What is the difference between a profit and loss statement and a balance sheet?
A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss
Where as the balance sheet shows what a company owns (assets) and what it owes (liabilities)
What is a cash flow statement?
It is a financial statement that shows the amount of cash that comes into and out of a business
When a business has positive cash flow, more money is coming into the business than leaving it.
When a business has negative cash flow, the opposite is true.
Cash flow affects the amount of money available for a business to fund its day-to-day operations, otherwise known as working capital.
How is a cash flow statement broken down?
It is generally broken down into cash relating to:
- Operations which includes transactions from all operational business activities
- Investment which relates to investment gains and losses, and
- Financing which provides an overview of cash used from debt and equity
What are the 4 size classifications of companies in the UK which affect requirements related to the preparation of financial accounts?
- Micro entity
- Small
- Medium , and
- Large
How is size classification determined in the UK with regards to the preparation of financial accounts?
Size classification is based on thresholds related to:
- Annual turnover
- Balance sheet totals, and
- Number of Employees
What are the deadlines for submitting financial accounts?
9 months from the accounting reference date (ARD) for private companies and 6 months for public companies
What are the penalties for submitting financial accounts late?
Financial penalties range from £150-£1,500 for Private Limited Companies and from £750-£7,500 for Public Limited Companies.
Penalties are doubled if accounts are filed late in two consecutive financial years.
If accounts are not filed at all, the company can be struck off the register and directors can face an unlimited penalty and run the risk of a criminal record.
What business taxes are there?
- Corporation tax
- National insurance (on employees)
- Capital gains
What is corporation tax?
Corporation Tax is a tax on profits that all UK limited companies are subject to.
What is the current corporation tax percentage?
25%
What is Employers National Insurance?
It is a type of National Insurance that employers have to pay to HMRC in respect of their employees’ wages.
What is capital gains tax?
It’s a tax on the profit from selling an asset.
What is turnover?
The amount of money taken by a business before any deductions
What is gross profit?
The total amount of money taken by a business, minus the cost of producing the goods sold
What is net profit?
The total amount of money taken by a business, minus the cost of producing the goods sold and ALL operating expenses
What are accounting standards?
Rules that must be adhered to when producing company accounts such as:
- Generally Accepted Accounting Principles (GAAP)
- International Accounting Standards (IAS)
What is the Companies Act 2006?
Legislation that governs how companies are managed, ran and financed.
Why do chartered quantity surveyors need to understand and be able to interpret company accounts?
- To review their own firms accounts and
- To assess the financial strength of contractors and those tendering for contracts
Why are keeping accounts important for a business?
To comply with legal requirements and to inform decision making and business planning
What headings would you expect to see in a set of accounts?
- Profit and loss statement
- Balance sheet
- Cash flow statement
How often are accounts expected to be lodged and where?
All private and public limited companies must file annual accounts with Companies House in line with the requirements of the Companies Act 2006.
How do you/ could you use company accounts in your role? (e.g. addressing contractors’ financial stability)
- To review own firms accounts and
- To assess the financial strength of contractors and those tendering for contracts
What is a balance sheet/ profit and loss statement?
A profit and loss account shows the incomes and expenditures of a company and the resulting profit or loss
Where as the balance sheet shows what a company owns (assets) and what it owes (liabilities)
