Accounts and regulation

Question 1

Income - Definition

Answer 1

What the business earns from trading or offering its services

Question 2

Expenses - Definition

Answer 2

Items the business has paid for and which it will benefit from for a short time

Question 3

Assets - Definition

Answer 3

What the business owns or has the right to own

Question 4

Liabilities - Definition

Answer 4

What the business owes

Question 5

Double entry bookkeeping - Definition

Answer 5

Two aspects of every transaction written in company’s books which have a left hand column and a righthand column. The left-hand column is called the debit column (DR) and the right-hand column is called the credit column (CR)

Question 6

Double entry bookkeeping - Debit definition

Answer 6

Debit = payment made or sum owed.

Question 7

Final accounts - Definition

Answer 7

Comprise the profit and loss account and the balance sheet

Question 8

Final accounts - Profit and loss account - Definition

Answer 8

Shows how profitable the business is, how successful it is in its day-today operations whether those operations are trading or providing services

Question 9

Final accounts - Balance sheet - Definition

Answer 9

Shows that the business is worth taking into account all of its assets and all of its liabilities.

Question 10

Final accounts - Profit and loss account - Calculation

Answer 10

Income - Expenses = Profit

Question 11

Final accounts - Trading accounts

Answer 11

Businesses which buy and sell goods have a preliminary account called a trading account. Shows gross profit by subtracting the cost of sales from the income received from sales.

Question 12

Final accounts - Balance sheet - Calculation

Answer 12

Assets - Liabilities = Net worth of the business.

Question 13

Final accounts - Balance sheet - Layout

Answer 13

Top half shows where the money is - tied up in fixed assets - employment of capital = where the money is now e.g stocks. Bottom half as shows you where the money came from e.g owner’s initial contribution - capital employed = where the money originally came from.

Question 14

Final accounts - Balance sheet - Fixed and current assets

Answer 14

Fixed assets = used in the business to enable it to run effectively, long-term assets e.g machinery and property. Current asset = short-term assets typically used up in a year e.g cash.

Question 15

Final accounts - Adjustments - Outstanding expenses

Answer 15

Expenses will be entered when they are paid. When preparing final accounts unpaid bills will be included as an adjustment. Whereas the profit and loss account and balance sheet will show expenses which have been paid

Question 16

Partnership accounts - The appropriation account

Answer 16

Partnership profit and loss accounts are prepared in the same way as the profit and loss account of sole traders but there will also be an appropriation account showing how net profit is divided between the partners

Question 17

Partnership accounts - The balance sheet

Answer 17

The capital and current account balances of each partner are shown separately on the balance sheet in the capital employed section

Question 18

Company accounts - Share capital account

Answer 18

The payment of money in return for shares is recorded in a share capital account. This records all the shareholder’s contributions. The section on the balance sheet which shows how much the shareholders have contributed is headed ‘capital and reserves’

Question 19

Company accounts - Profit and loss account

Answer 19

Will look similar to account of sole trader, it will show trading income and expenses and the figures are calculated using same accounting principles. When the company pays its directors a salary it is a common expense and will appear as an expense on the profit and loss account.

Question 20

Company accounts - Appropriation of profit - Taxation

Answer 20

Profit and loss account will show that a certain sum is needed to pay the company’s corporation tax bill. Will do this by showing the company’s profits before and after tax. Will appear as a current liability on the balance sheet.

Question 21

Company accounts - Appropriation of profit - Dividends

Answer 21

Only permitted to pay dividends from profits. They will not be included as an item in the profit and loss account but once paid the cash figure will be reduced accordingly.

Question 22

Company Accounts - Balance sheet - Capital and reserves

Answer 22

Main difference is in the capital employed section which is usually called the capital and reserves section. The reserves part shows what the company ‘owes’ to its shareholders (the money shown in here would be paid to the shareholders if the company were wound up).

Question 23

Company accounts - balance sheet - capital and reserves - Profit and loss reserve

Answer 23

Revenue reserve = can in theory be distributed to shareholders. This consistis of the company’s profits after tax and after payment of any dividends. If the company makes a profit every year and there is still some left after payment of tax and dividends it will be added to the profit and loss reserve.