BUS7.12: Accounts and requirements Flashcards
Purpose of Accounts
Accounts enable a business to report on its financial activity and to work out how much tax is payable
- Inform owners and potential investors about the business’s financial performance and health.
- Establish the amount of profit available for distributing to owners by reference to profits shown in the accounts.
- Indicate the type of liabilities and level of debt the business may be servicing and bonuses paid to owners, executives or other staff
Profit and Loss Account
Shows revenue or income, costs and how much profit or loss the business made over the period of the statement or financial year. Would include wages as a loss
Balance Sheet
An accounting document that provides a snapshot of the business’s financial health on the last day of its accounting record. It lists the assets, liabilities, and capital employed. Assets are listed from least to most liquid.
All expenses are shown on here
What is the Accounting Reference Date (ARD)?
Financial years are determined by reference to an accounting reference period ending on a specific date. This is the anniversary of the last day of the month in which the company was incorporated.
Consequences of Failure to Deliver Accounts
Civil and criminal penalties apply for failure to deliver accounts. Specific offences are listed in the Companies Act and on a summary conviction, the penalty is a fine.
Micro-Entity Accounts - Key Features
- turnover of less than £632,000
- balance sheet total: less than £316,000
- less than 10 employees
Date of balance sheet:
It’s only a snapshot on a particular day
Key Financial Ratio - Gross Profit Margin: how would you calculate
(Gross Profit / Sales) x 100. Shows profitability of core business activity (profit made per £1 of goods/services sold before indirect expenses)
Key Financial Ratio - Net Profit Margin
(Net Profit / Sales) x 100. Indicates the overall profitability of the business after taking into account all expenses (but not loan/debenture interest payments/tax)
Key Financial Ratio - Return on Capital Employed
(Net Profit / Capital Employed) x 100. Capital employed = owner/shareholder funds and long-term loans. Shows the profit being made on the resources available to the business
Capital - meaning?
Funds invested by investors i.e. shareholders in a company
Assets
Those items that provide long-term value for business and can be sold. These can be fixed assets (long-term, e.g., plant and machinery) or current assets (short-term, e.g., cash, stock).
Liabilities
Company’s debts. These can be current liabilities (debts due to be paid in less than a year, e.g., overdraft) or long-term liabilities
Net Profit
Turnover/income less expenses
What is the accounting reference date (ARD)?
Defines the end of a company’s financial year. It is the anniversary of the last day of the month in which the company was incorporated.
Date determines the period for which a company must prepare its annual accounts.
How can the ARD be changed?
The ARD can be changed by the directors passing a board resolution and filing Form AA01 at Companies House (or Form LL AA01 for an LLP). Can be shorterned as many times as they want but can only be lengethened once every 5 years.
How many times can the ARD be lengthened every 5 years?
Once in every 5 year period
Give me an example of what appears on the balance sheet
Debtors
When must a private limited company file its accounts on Companies House
A private limited company must file its accounts at Companies House within 9 months from its accounting reference date.
The balance sheet is a snapshot of the
Accounting reference number
What measures a business’s liquidity?
Acid test ratio measures a businesses liquidity because it shows the extent to which a business has sufficient current assets (less stock) that it can convert into cash to cover its debts as they fall due.
What measures a businesses profitability?
Return on capital employed
Trade debtor days
calculation used to determine the average number of days’ credit a business gives to its customers, or how long the business must wait to get paid by its debtors.
Calculated by (Trade Debtors x 365) / Sales
