accounting unit 2 Flashcards
concepts- going concern
assets which are valued on the assumption that the business will continue to trade.
concepts- prudence
being cautious or careful, anticipate all loses, but no profit
concepts- consistency
where you use the same accounting policies year on year e.g. depreciation use straight line for the whole period. so it allows direct comparisons to be made.
you can change methods but have to start at the beginning.
concepts- realisation
profit must not be accounted for until achieved. e.g. ignore future orders
concepts- objectivity
must be seen to be fair, (objective rather than subjective) e.g. van cost £8000 (prudence), value £23000 (not going concern) and would not sell for £10000 (subjective)
concepts- cost
assets should be valued at cost, this is objective and leaves little room for doubt.
concepts- materiality
assets that have very low value are considered as immaterial and are put direct to expenses. e.g. tables which are 10 years old, they would be under sundry expenses (small expenses lumped together)
concepts- business entity
business and personal expenses which never mix. (drawings and goods for own use)
concepts- accruals
expenses and income for goods and services which are matched to the same time period.
ratio’s- gross profit margin (profitability)
gross profit divided by revenue x100
ratio’s- gross profit mark up (profitability)
gross profit divided by cost of sales x 100
ratio’s- profit margin (profitability)
profit for the year divided by revenue x 100
to improve the profit margins (all 3 ) the selling price per unit or cost per unit must change
ratio’s- overheads in relation to revenue (profitability)
overheads or expenses divided by revenue x 100
ratio’s- net profit margin (profitability)
net profit divided by revenue x 100
ratio’s- return on capital employed (profitability)
net profit divided by capital employed x 100
