Business Accountancy Terminology (O1)

Question 1

Bank`

Answer 1

The bank account records what money the business has at the bank. It shows cash/cheques paid in and withdrawn.

Question 2

Cash

Answer 2

This records cash received (before it is paid into the bank) and cash payments.

Question 3

(Trade) Creditors

Answer 3

Suppliers who are owed money by the business because the business has purchased stock on credit from the suppliers.

Question 4

(Trade) Debtors

Answer 4

Customers who owe money to the business because the business has sold stock on credit to them.

Question 5

Stock

Answer 5

Goods purchased by the business for resale purposes

Question 6

Opening Stock

Answer 6

Stock in the business at the beginning of the trading year. Closing stock - stock remaining in the business (unsold stock) at the end of the year.

Question 7

Purchases

Answer 7

Those goods (stock) which are bought for cash or on credit with the intention of selling them (normally at a profit).

Question 8

Sales

Answer 8

This represents the value of stock sold to customers for cash or on credit.

Question 9

Cash Discounts

Answer 9

Discount Allowed - to debtors as long as they settle their debts within in a specified period of time - a business expense. Discount Received - from creditors if the business has settled its debts within a specified period of time - a form of business income.

Question 10

Trade Discount

Answer 10

A form of special discount given eg for large orders or special customers, usually between businesses in the same trade. It represents a reduction in the list/catalogue price and is only shown on the original invoice. Trade discounts are not recorded in the accounting books.

Question 11

Petty Cash Book

Answer 11

Items of small expenditure are recorded in this book eg payments for stamps, paying a window cleaner, bus fares. The purpose is to reduce the number of entries in the main Cash Book.

Question 12

Purchases Returns (Returns Out)

Answer 12

Stock a business returns to its suppliers (creditors) becauses it is not what was ordered or it was damaged in transit.

Question 13

Sales Returns (Returns In)

Answer 13

Stock returned to a business by customers (debtors) who have previously been sold the stock on credit.

Question 14

Carriage In

Answer 14

Delivery costs involved with stock coming into a business from suppliers.

Question 15

Carriage Out

Answer 15

Delivery costs involved in delivering stock to customers (debtors)

Question 16

VAT

Answer 16

Value Added Tax - tax on the supply of goods and services - 3 categories: exempt, zero-rated and standard rated (20%). Collected by HM Revenue and Customs. VAT Account records Input VAT - paid by business on goods and services purchased by the business - and Output VAT - charged by businesses on the supply of goods and services. Input VAT is set off against Output VAT to find out whether the business is a Creditor or Debtor of HM Revenue and Customs.

Question 17

Final Accounts

Answer 17

Trading, Profit and Loss Account Balance Sheet
Both of these statement are usually prepared by all forms of business organisations at the end of a trading/accounting year.
The Trading, P & L Account shows trading and non-trading income and the expenses the business has incurred as a result of generating that income. Expenses are deducted from income (ie expenses are MATCHED against income) to calculate profit.

Question 18

Liabilities

Answer 18

Debts owing by the business - Current and Long-term

Question 19

Current Liabilities

Answer 19

Amounts owing by the business which should be repaid within a year. For example bank overdraft, creditors, bills outstanding (accruals)

Question 20

Long-term Liabilities

Answer 20

Amounts owing by the business which will be repaid during a period of time in excess of a year.

Question 21

Where is the accounting equation shown?

Answer 21

The accounting equation is shown in a statement called the BALANCE SHEET, which shows the assets and liabilities of the business and therefore the net worth of the business.

Question 22

Assets

Answer 22

Assets are items the business owns, items of value possessed by the business, what it needs to enable it to trade - Fixed Assets and Current Assets.

Question 23

Fixed Assets

Answer 23

Fixed assets are more permanent in the business. They are used by the business to generate sales and are not intended for resale. Their cost is written off over a number of years through the process of depreciation. For example land and buildings, plant and machinery, fixtures and fittings, equipment, motor vehicles.

Question 24

Current Assets

Answer 24

Current Assets are those assets whose values change constantly - stock, debtors, prepayments, bank and cash. They are a part of the WORKING CAPITAL of the business - funds required by the business to enable it to continue trading from one day to the next eg to enable it to buy stock, pay wages, pay electricity bills - calculated by subtracting Current Liabilities from Current Assets.

Question 25

Capital

Answer 25

What the owner/proprietor has invested in the business out of her/his private resources in order to start the business and keep the business going. The owner of the business will pay her/himself a salary each week from the business, may take stock out of the business from time to time for her/his private use - these are examples of DRAWINGS made from the business by the owner of the business. DRAWINGS reduce the owner’s investment in the business ie drawings reduce the amount of capital invested in the business.

Question 26

Accounting Equation

Answer 26

In most businesses, the owner does not have enough resources to finance all the assets and some of the assets are financed from individuals/organisations outwith the business ie by borrowing. Therefore the business has debts ie LIABILITIES. This is shown by:
ASSETS = CAPITAL + LIABILITIES
The two sides of the equation must balance, must have the same totals.
The total value of assets will always equal the total value of capital plus liabilities.