APC Accounting principles and procedures Level 1

Question 1

Why should you keep accounts?

Answer 1

• To keep track of money coming and money going out so they know they can pay their bills and suppliers.
• So they can monitor profit and loss and company performance.
• Use the information for future business planning
• So they can submit annual financial statements to Companies House

Question 2

What is the difference between Management and Company accounts?

Answer 2

• Management accounts are used internally by the managers of the business.
• Financial accounts are company accounts required by law and audited by a Chartered Accountant.

Question 3

What is meant by the terms Gross and Net?

Answer 3

Gross refers to the total amount before anything is deducted. Many important accounting statistics use this method, such as gross earnings and gross profit. Net refers to the amount remaining after certain adjustments have been made for debts, deductions or expenses.

Question 4

What is a balance sheet?

Answer 4

• A balance sheet is a statement showing a business’s financial position at a point in time.
• It shows a business’s assets and liabilities at a given date, usually at the end of a financial year.

Question 5

What is a profit and loss account?

Answer 5

• A summary of a business’s income and expenditure transactions usually prepared on an annual basis.
• P&L Accounts demonstrate how the revenue is transformed into the net income - how the actual income the business receives transfers into profit for the year.

Question 6

What is a cashflow statement?

Answer 6

• Cash flow shows the actual receipts and expenditure and includes VAT.
• Reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers etc.
• Review cash flow helps ensure businesses can afford to pay suppliers and employees i.e. the cash coming in is enough to cover the cash going out.

Question 7

What is meant by depreciation in relation to an asset?

Answer 7

Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.

Question 8

What are the main types of ratio analysis used to assess a company’s financial strength?

Answer 8

• Liquidity – the ability of the company to pay its way (solvency). More companies fail due to cash flow than any other reason.
• Current Ratio = Liquid assets / Liabilities.

Question 9

What are Generally Accepted Accounting Principles? - (GAAP)

Answer 9

Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements.