Accounting Principles (Level 1) Flashcards
What is a balance sheet?
A statement / snapshot of financial position at a point in time. It shows a company’s assets (owns), liabilities (owes) and value of equity (owners investment)
What are assets?
A resource owned or controlled by a business. These can be tangible and non-tangible (physical and non-physical items).
Name a few examples of assets
Tangible - Cash, property, inventory, vehicles.
Non-Tangible - Financial investments and intellectual property
What is a Profit & Loss account/statement?
Shows a company’s revenue and expenses over a particular period of time, typically either a month or year. It will show whether the company has made a profit or loss over that time period.
It’s a retrospective statement, not current.
What is P&L used for?
Used to calculate both income and corporate tax. Failure to file either of these correctly can result in penalties and/or added interest. It also assesses a company’s financial health
What’s the difference between a balance sheet and P&L statement?
A balance sheet is a snapshot of how effectively a company uses its resources and and P&L provides info on whether a company can generate profit by increasing revenue, reducing costs or both.
What is GAAP?
Generally Accepted Accounting Principles
This is the body of accounting standards published by the UK’s Financial Reporting Standard (FRS 102)
This is a common set of accepted accounting principles, standards and procedures company’s and accountants must follow when they compile their company accounts.
What is the IFRS?
International Financial Reporting Standards
This replaced the International Accounting Standards in 2001 and it states how certain transactions or events should be reported in financial statements. Plc businesses will have more reporting requirements to IFRS.
What’s the difference between GAAP and IFRS?
GAAP are general accounting principles for location i.e. Sox Compliancy or location based. Whereas IFRS are internationally known accounting principles.
Why do firms publish their accounts?
Required by law to publish your accounts for HMRC to establish tax.
If plc, it also allows stakeholders to review
What’s the difference between an accrual and a liability?
An accrual is an expenditure you may not need to pay whereas a liability is a cost that you’re contractually obliged to pay
What’s the difference between company accounts and management accounts?
Company accounts are statutory and are required, by law, to be published to HMRC for tax purposes.
Management accounts are in-house based forms/procedures i.e. CVR’s
What is capital allowance?
A form of tax relief
An expenditure which may be used to claim against taxable profit
What is taxation?
Payments to a central or local government
Central - Income tax, National insurance, VAT, Corporation tax
Local - Grants, Business rates, Council tax
What is Corporation tax?
Tax imposed on businesses’ profits, investments or selling assets
Limited companies pay corporation tax
What taxations do construction companies incur?
Sales tax when they purchase materials, Construction Industry Scheme (CIS) tax, VAT (domestic reverse charge), stamp duty (when buying land) and business rates to local communities
What is CIS?
Construction Industry Scheme Tax
Contractors deduct money from a Subcontractors payments and pass on to HMRC for taxation purposes. This is usually imposed on self employed personnel for labour cost only
What is Domestic Reverse Charge VAT?
On March 1st 2021 the construction industry allowed customers to charge themselves VAT and pay it directly to HMRC rather than the supplier sending them an invoice at a later date, which in turns stops suppliers from avoiding paying HMRC, known as missing trader fraud.
What is cashflow?
Cashflow is the movement of income and expenditure of a business and allows a company to track if they can cover their liabilities. It allows a company to understand when there may be shortfalls in cash, which will affect paying suppliers.
How can you improve cashflow?
Shorter payment terms with clients and longer payment terms with suppliers
How do Construction cashflows work?
Cashflows are utilised to understand when costs will be incurred and the total cost of that project activity will be at the project life cycle.
It allows the Contractor to identify when funding is required and that appropriate draw down is in place
How would a Client manage cashflow?
Prior to the Contractor being appointed, they would use Consultant appointments to measure expenditure across the project lifecycle however may not be entirely accurate until a programme has been agreed
What is auditing?
It is an independent examination of accounting and financial records/statements to determine if they conform to law and appropriate accounting principles
What is the role of the auditor?
Verify the accuracy of the accounts. They are to ensure they are published within the law and within appropriate accounting principles (GAAP or IFRS)
