Accounts and regulation

Question 1

What information do accounts provide?

Answer 1

Businesses need to be able to calculate their profits. They need to know how much income they have received and what expenses have incurred. They also need to know what their assets and liabilities are to figure out how much the business is worth.

Question 2

Income - Definition

Answer 2

What the business earns from trading or offering its services

Question 3

Expenses - Definition

Answer 3

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

Question 4

Assets - Definition

Answer 4

What the business owns or has the right to own

Question 5

Liabilities - Definition

Answer 5

What the business owes

Question 6

Keeping records of transactions

Answer 6

Businesses must keep records of every financial transaction. They do this using the double entry book-keeping system

Question 7

Double entry bookkeeping - Definition

Answer 7

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 8

Double entry bookkeeping - Debit definition

Answer 8

Debit = payment made or sum owed.

Question 9

Final accounts - Definition

Answer 9

Helps the business work out how well they are performing financially. Comprise the profit and loss account and the balance sheet

Question 10

Final accounts - Profit and loss account - Definition

Answer 10

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

Question 11

Final accounts - Balance sheet - Definition

Answer 11

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

Question 12

Final accounts - Profit and loss account - Calculation

Answer 12

Income - Expenses = Profit
If the business’s income exceeds its expenses the business has made a profit. If the business’s expenses exceed its income the business has made a loss

Question 13

Final accounts - Trading accounts

Answer 13

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. This figure is then transferred to the profit and loss account.

Question 14

Final accounts - Balance Sheet - Definition

Answer 14

Shows the worth or value of the business by listing its assets and liabilities on the last day of the accounting period.

Question 15

Final accounts - Balance sheet - Calculation

Answer 15

Assets - Liabilities = Net worth of the business.

Question 16

Final accounts - Balance sheet - Layout

Answer 16

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 17

Final accounts - Balance sheet - Fixed and current assets

Answer 17

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 18

Final Accounts - Adjustments - Accrual basis

Answer 18

Bills which have been received but not paid will not appear in the accounts, so the business will look as if it is better off financially than it really is. Due to this final accounts are prepared using the accrual basis - income and expenses are recorded in the period to which they relate instead of in the period when payment or receipt occurs. When final accounts are prepared there will have to be some adjustments.

Question 19

Final accounts - Adjustments - Outstanding expenses

Answer 19

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 20

Final accounts - Adjustments - Prepayments

Answer 20

Payment which the business has made in advance. They are added to the balance sheet as current assets

Question 21

Partnership accounts - The appropriation account

Answer 21

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 22

Partnership accounts - The balance sheet

Answer 22

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

Question 23

Company accounts - Share capital account

Answer 23

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 24

Company accounts - Profit and loss account

Answer 24

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 25

Company accounts - Appropriation of profit - Taxation

Answer 25

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 26

Company accounts - Appropriation of profit - Dividends

Answer 26

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 27

Company Accounts - Balance sheet - Capital and reserves

Answer 27

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 28

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

Answer 28

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.