Accounting Principles & Procedures Flashcards
What is a balance sheet
One of 3 key financial statements. It shows a company’s assets, liabilities and equity at a specific point in time (last day of financial year). Assets – Liabilities = Owners Equity or Capital. It can be used to assess its financial position or health, and be compared with previous balance sheets to identify trends.
What is a cashflow statement
Another key financial statement. It shows cash moving in and out of a company for a specific period, and is generally broken down into cash relating to operations, investment ad financing. The statement will show the net cash-flow position, which helps assess liquidity and shows changes in assets, liabilities and equity. It is produced by logging the monthly/ periodic cash in & cash out the door and at the end of the month the balance between cash in and out provides the net cashflow which is carried forward to the next month.
What is a profit & loss statement?
Also known as the income statement, this is the third of the three key financial statements. It shows all of the income and operating expenditure of the company over a specific period (usually financial year), culminating in the net profit or loss made.
Turnover (i.e. Sales Revenue) - Cost of Sales = Gross Profit
Gross Profit - Administration & Interest expense = Net Profit (before tax) – Tax = Profit After Tax
How to use current liabilities and turnover ratio analysis
Current liabilities ratio: current assets / current liabilities = Liquidity
Turnover ratio: gross profit / turnover = profitability
Our company required liquidity of at least 1.2 and profitability of 10% as part of financial account evaluation. This was using evaluation of accounts across the last 3 years.
How liabilities are to be included in the cost reports and balance sheets.
A liability is typically an amount owed by a company to a supplier, bank, lender or other provider of goods, services or loans.
Liabilities should be recorded on a balance sheet as either current or non-current.
Current liabilities include all liabilities that are expected to be paid within one year e.g. payments for debts, accounts payable and other bills that are due to suppliers and other providers.
Long-term liabilities/ non-current liabilities refer to all liabilities that aren’t due in full within the year. This group can include loans, deferred tax obligations and any pension payments.
Legislation relevant to accounting
IR35 (off-pay roll working)
Companies Act 2006
Companies Act 2006
Piece of legislation that serves as the main source for company law governing the UK. Part 15 details the accounting/ reporting requirements for companies, these will differ dependant on if it is a private/ public company and also the size.
What is IR35 (off pay roll working) regulation
The off-payroll working rules (IR35) make sure that a worker (sometimes known as a contractor) pays broadly the same Income Tax and National Insurance as an employee would. The client (TfL) is responsible for determining the worker’s employment status for tax, and they should produce a status determination statement (SDS) including the reasons for their determination. If the worker is deemed to be employed for tax purposes, the deemed employer must deduct Income Tax and employee National Insurance contributions from fees paid to the worker’s intermediary.
UK Generally Accepted Accounting Principles
- Regularity- compliance with enforceable rules and laws.
- Consistency- methods and procedures should be the same from period to period.
- Sincerity- Finance should reflect in good faith the company’s financial status m
- Permanence of Methods- ensure coherence and allow for comparison of the financial data published by the company.
- Non-Compensation- Cover the full scope of financial accounting information rather than to compensate a debt with an asset or a revenue with an expense, for instance.
- Prudence- present the facts “as they are” – something should not be distorted to look more appealing than it actually is.
- Continuity- Financial information should be presented in a way as if the business is not going to be interrupted.
- Periodicity- A financial accounting entry should be allocated to a given period
- Full Disclosure/Materiality- All financial accounting information and values regarding a business’s financial position must be disclosed in the records.
UK GAAP vs IFRS
The Financial Reporting Council (FRC) publishes accounting standards called UK Generally Accepted Accounting Practice (UK GAAP). For UK businesses, this is a regulatory body that provides guidance when preparing financial reports and accounts. The UK GAAP regulations do not apply to all UK companies. To ensure compliance, listed companies use UK GAAP, while non-listed companies use International Financial Reporting Standards (IFRS).
What is auditing?
a report prepared by an auditor as an independent party confirms that the financial accounts of a company are fair and true. Under the Companies Act 2006, such reports must be prepared for all public limited companies (PLCs).
What is Equity?
this is a key term in accounting, also known as owner’s equity. It is effectively the value that the owner – such as a company director – has in the business. This can be calculated by deducting total liabilities from total assets on a company balance sheet.
What is the difference between a profit & loss statement and a balance sheet?
- balance sheet is a statement of assets, liabilities and capital which shows a businesses financial position
- profit and loss is a statement of income and expenses which shows a businesses financial performance
What financial statements are to be submitted to Companies House?
- balance sheet
- profit & loss statement
What ratios can be used to assess financial stability of a company?
- Liquidity
- Turnover
- Gearing
- Current ratios
