Accounting Principles & Procedures

Question 1

What is a Balance Sheet?

Answer 1

A Balance Sheet is a statement of the business’s financial position showing its assets and liabilities at a given date, usually at the end of the financial year.
Assets include cash, property, debtors, and other investments held
Liabilities include borrowings, overdrafts, loans, and creditors.

Question 2

What is a Profit and Loss Account?

Answer 2

A Profit and Loss Account (income statement) is a summary of the business’s income and expenditure transactions, prepared usually on an annual basis.

Question 3

What is cash flow?

Answer 3

Cash flow is the movement of money in and out of a company.

Question 4

What are the International Finance Reporting Standards, 2016?

Answer 4

International Finance Reporting Standards are a set of accounting procedures which help to set out financial reporting international to create consistency.
IFRS 16 is the lease accounting standard which all companies have to comply with when using IFRS. The full cost of leases have to be accounted for on the balance sheet. An occupier’s obligation to pay rent has to be recognised as a liability (service charge is separate). Exemptions exist for leases 12 months or shorter.

Question 5

Other than IFRS, do you know of any other accountancy standards?

Answer 5

I am aware of GAAP - Generally Accepted Accounting Principles. This is used in North America and sets out a common set of accounting rules and standards.

Question 6

What is the importance of an independent external auditor?

Answer 6

Chartered Accountants verify the accounts and this is verified by a qualified professional.

Question 7

Can you obtain a CreditSafe Report on an individual?

Answer 7

No - I would request proof of funds - 3 years’ worth of audited accounts.

Question 8

What are contained in a set of Public Limited Company accounts?

Answer 8

• Chairman’s Statement
• Independent auditor’s report
• Profit and Loss Account (income statement)
• Statement of financial position (balance sheet)
• Corporate governance report
• Remuneration report
• Other statutory information

Question 9

What are Management Accounts?

Answer 9

Management Accounts are prepared for internal use by a business and are not audited.

Question 10

What is a Consolidated Set of Accounts?

Answer 10

A Consolidated Set of Accounts comprises a number of individual subsidiary accounts for a company within a single set of accounts.

Question 11

Explain your understanding or the term Tax Depreciation?

Answer 11

Tax Depreciation is where the declining value of an asset is offset against a company’s taxable profit.

The depreciation value can be recorded as an expense to reduce the amount of taxable income.

Can be applied on things such as plants, tools, vehicles, computers, furniture, and buildings.

Question 12

What are overheads?

Answer 12

Overheads are the operating costs of the business that are incurred on an ongoing basis. They can be fixed or variable.

Example of fixed overheads include tent on office buildings or building insurance.

Variable overheads tent to fluctuate depending on the activity of the business e.g., utility bills.

Question 13

What is an ESCROW account?

Answer 13

Contractual agreements used as financial instruments within a transaction.

Asset or currency being transferred between two primary parties is held by an intermediary third party.

Currency being exchanged is securely held by the third party until each party has met their contractual obligations allowing for the money to be transferred.

Often used by mortgage lenders when completing on the buying or selling of real estate.

Question 14

Name three different types of accounting ratios.

Answer 14

1. Liquidity Ratios – considers an organisations ability to pay their debt obligations and assesses its margin of safety by looking several metrics e.g., operating cash against short term debts.
2. Profitability Ratios – Assesses an organisations ability to generate profits from its sales operations and shareholding equity. Ratios indicates how efficiently a company is in generating its profit.
3. Gearing Ratios – Compares capital within a company against its debts. Gearing is a measure of company’s financial leverage and sets out what proportion of the firms’ activities are funded by shareholders vs its creditors.

Question 15

Why do businesses keep company accounts?

Answer 15

Records and measures a company’s profitability.

Tax calculation including tax calculating taxable deductions.

Legislation requires companies to keep accurate records.

Business Growth is encouraged by identifying profitable operations whilst also allowing management to minimise any loss-making activities.

Question 16

What is financial leverage?

Answer 16

The concept of using borrowed funds in the form of debt to enhance business operations and increase the company’s profitability and rates of return.

Where that rate of return invested via borrowed funds is higher than the interest of those funds then more profit can be generated in the concept of financial leverage.

Question 17

What are capital allowances?

Answer 17

Capital allowances permit taxpayers to gain tax relief by using their expenditure to be deducted from their taxable income.

Expenditure used to lower taxable income is only allowed within certain categories, including:
o Plant and machinery.
o Integral parts of Structures and buildings (lifts, escalators etc.)
o Research and development costs.
o Patents.

Question 18

What is the difference between a current asset vs a fixed asset?

Answer 18

Current assets can normally be converted into cash within one financial year and are regarded as assets that allow day to day operation of the business. E.g., money owed to the company following sales of its products or services, inventory, and prepaid expenses.

Fixed assets typically cannot be converted into cash within one year. These kinds of assets are recorded on a company’s balance sheet as fixed assets the company owns on a long-term basis. E.g., vehicles, office furniture, machinery, buildings, and land.