Accounting principles and procedures L1

Question 1

Explain your understanding of the term tax depreciation (3)

Answer 1

• Tax depreciation is where the declining value of the 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
• Can be used on items such as vehicles, machinery, tools, buildings

Question 2

What are overheads and give examples (4)

Answer 2

• The operating costs of a business that are incurred on an ongoing basis
• Overheads can be fixed or variable
• Example of fixed overhead is rent on office buildings
• Example of variable overhead is delivery or utility charges

Question 3

What is an escrow account (2)

Answer 3

• Contractual agreements that are used as financial instruments within a transaction
• They are used to hold money, the buyer and the seller receive their share when the contractual agreements have been completed

Question 4

Name 3 different types of accounting ratios

Answer 4

• Liquidity ratios: used to determine a companies ability to pay its short term debt obligations
• Profitability ratios: indicates how efficiently a company is generating profit
• Gearing ratios: measure of a companies financial leverage

Question 5

Why does a business keep company accounts (3)

Answer 5

• Record and measure a companies profitability
• Tax calculations including calculating taxable deductions
• Legislation requires companies to keep an accurate record

Question 6

What is financial leverage (2)

Answer 6

• Concept of using borrowed funds in the form of debt to enhance business operations and increase rate of return
• In the event the rate of return is higher than the interest on those funds then more profit can be generated

Question 7

What are capital allowances (1)

Answer 7

• Allow tax payers to gain tax relief by using their expenditure to be deducted from their taxable income

Question 8

What is the difference between a current asset and a fixed asset

Answer 8

• Current assets can normally be converted into cash within one financial year e.g. sale of its products
• Fixed assets cannot be converted into cash within one year, the company own them for a long term basis e.g. vehicles