Accounting Principles & Procedures

Question 1

Key accounting terms

Answer 1

• Accrual – money that a business has earned or spent but has not yet been paid, e.g. a payment from a client or an amount owed to a supplier;
• Turnover (revenue) – total sales;
• Cost of sales – the cost of producing the goods and services a business sells;
• Gross profit – turnover minus the cost of sales, e.g. wages relating to a specific service;
• Gross profit margin – gross profit divided by revenue, multiplied by 100;
• Operating expenses – the expenditure needed to support the overall running of the business, such as rent, rates and utility costs;
• Net profit (bottom line) – gross profit minus operating expenses (overheads) and taxes. This is the amount of money that can be distributed to the business owners or reinvested in the business;
• Net profit margin – net profit divided by revenue, multiplied by 100. A high profit margin is desirable to a business.

Question 2

Under what legislation are financial accounts required?

Answer 2

Companies Act 2006

Question 3

When does the UK tax year run from and to?

Answer 3

6th April to 5th April.

Question 4

What documentation do companies need to provide to Companies House on an annual basis?

Answer 4

• a profit and loss account
• a balance sheet (signed by director on behalf of the board)
• notes to the accounts
• Depending on the size of a company, the accounts may need to be accompanied by a director’s report (e.g. for a medium size and above company) and an auditor’s report.
• Companies must also file an annual confirmation statement to Companies House. This confirms vital information about a company, such as directors, secretaries, people with significant control, registered office address, shareholder information and Standard Industrial Classification (SIC) code.

Question 5

What are the consequences of failing to file or filing company accounts late with Companies House?

Answer 5

• It is a criminal offence and financial penalties also apply to late filing.
• A company may be assumed to have ceased trading and can be struck off the register. The company’s assets would then become Crown property.

Question 6

How long do companies need to keep accounting records for?

Answer 6

• Private companies – 3 years (from the date they were made)
• Public companies – 6 years (from the date they were made)

Question 7

What is a profit and loss statement?

Answer 7

• It shows the income and expenditure of the company over a specific period, culminating in the net profit or loss made.
• The profit and loss statement can be used to calculate the company’s profit margin; that is, how efficiently the company is converting revenue into profit.

Question 8

What is a balance sheet?

Answer 8

• A balance sheet shows a company’s assets (what it owns), liabilities (what it owes) and equity at a specific point in time.
• It can be used to assess its financial position or health, and be compared with previous balance sheets to identify trends.
• The balance sheet demonstrates the value of the business at any given point in time.

Question 9

What is a cash flow statement?

Answer 9

• It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period.
• It measures the short-term ability of a firm to pay off its bills.

Question 10

What is a director’s report?

Answer 10

Provides information on:

• whether the company’s finances are in good health.
• how well the company’s performing.
• whether the company has capacity to expand and grow.
• how well the company’s complying with financial regulations.

Question 11

What is the role of an auditor?

Answer 11

• Auditors verify an accountant’s work.
• They examine the financial statements prepared by accountants and ensure they represent the company’s financial position accurately.

Question 12

What types of company must have their accounts audited?

Answer 12

Public Limited Company (PLC).

Question 13

What types of business are exempt from auditing?

Answer 13

Small or micro sized businesses.

Question 14

What are the different size categories of businesses for accounting purposes?

Answer 14

• Micto-entity.
• Small.
• Medium.
• Large,

These are based on turnover, balance sheet and employee numbers.

Question 15

What is classed as a micro-entity?

Answer 15

A company can file micro-entity accounts if it has any 2 of the following:

• your turnover does not exceed £632,000
• your balance sheet does not exceed £316,000
• you have no more than 10 employees

Question 16

What is classed as a small company?

Answer 16

Your company will be ‘small’ if it has any 2 of the following:

• your turnover is less than £10.2 million
• your balance sheet is less than £5.1 million
• you have fewer than 50 employees

Question 17

What are the Generally Accepted Accounting Practice in the UK (UK GAAP)?

Answer 17

The body of accounting standards published by the UK’s Financial Reporting Council (FRC).

Question 18

Can you name some accounting standards?

Answer 18

• International Financial Reporting Standards (IFRS) – Set common rules so that financial statements can be consistent, transparent and comparable around the world.
• IFRS are issued by the International Accounting Standards Board (IASB).
• Generally Accepted Accounting Principles (GAAP).

Question 19

Why might it be important to review a contractor’s Companies House records when selecting contractors to tender for a project and how would you go about doing this?

Answer 19

• It is important to establish a contractor’s financial position to ensure that there is limited risk of them becoming insolvent during the project.
• Records can be downloaded from Companies House, showing information such as annual turnover and assets and liabilities.

Question 20

What factors affect cash flow in a company?

Answer 20

• Clients not paying invoices on time.
• Long payment periods.
• A lack of instructions / productivity.
• Overheads.
• General costs associated with running a company.

Question 21

What is a Dun and Bradstreet Report?

Answer 21

• A business credit report.
• Provide information of a company’s financial and credit risk status.

Question 22

What sort of information would you expect to find within a credit report?

Answer 22

• A credit rating, typically from A–E with A being the strongest, alongside an associated numerical rating;
• Information on the business;
• Ownership;
• Key financials, including a summary and in-depth data.