Business Accounts

Question 1

What are the key ledgers appearing on the company’s balance sheet?

Answer 1

Assets
Liabilities
Income
Capital
Expenses

ALICE!

Question 2

How are net current assets calculated?

Answer 2

first four ledgers on balance sheet

= Assets minus current liabilities
- current liabilities - those due within next year.

Question 3

To calculate net assets, what assets and liabilities are taken into account?

Answer 3

All of them, including long-term liabilites, which are excluded when calculating net current assets.

Question 4

What are four adjustments appears on a company’s balance sheet?

Answer 4

• accruals
• prepayments
• bad/doubtful debts
• depreciation

Question 5

What are the two ways to adjust accounting entries to take into account depreciation?

Answer 5

Straight-line method - where use and income produced from asset is linear and consistent through its lifetime.
- evenly account for depreciation throughout.

Reducing balance method - where asset produces higher revenue at the start, but loses a large part of its value at a certain point.
- account for greater share of depreciation in earlier years.

Question 6

How is depreciation accounted for on the profit and loss account?

Answer 6

entered as a ‘cost’/expense

Question 7

What is an accrual and where does it appear on the business accounts?

Answer 7

where goods/services have been provided, but by the end of its accounting period, business has not yet been invoiced.
- charged to earlier accounting period regardless - included as an ‘expense’ (P&L) and as an accrual of current liability (balance sheet)

Question 8

What is a prepayment and where does it appear on the business accounts?

Answer 8

opposite of an accrual, where busienss has paid for something, but not yet received its benefit.
- adjustments made to charge costs to next year.

Question 9

What is the difference between doubtful and bad debts?

Answer 9

bad debts are entirely written off, and doubtful debts are those business is unsure will be repaid.
- specific doubtful debts - knowledge specific debtor is in financial trouble, so uncertain about prospect of full recovery.
- general doubtful debts - general deduction if market is not going too well.

Question 10

In a partnership, how are business accounts compiled?

Answer 10

each partner has their own accounts -
(i) capital account - represents value of partner’s investment in firm
(ii) current account - records income/share of partner’s ongoing business + records any drawing taken out during the year.

Question 11

What information is contained within a company’s statement of equity?

Answer 11

forms part of company’s accounts, and represents transactions between the company and its shareholders.
shows = profits brought forward + current year profits - dividends paid out.

Question 12

What three types of capital accounts appear on a company’s balance sheet?

Answer 12

• share capital
• reserves
• retained earnings

Question 13

Once a dividend is declared, how is this recorded on a company’s accounts?

Answer 13

• balance sheet - simply appears as deduction of ‘retained earnings’ (only if dividend is already paid!)
• attached SOCIE - details appear

Question 14

If the dividend is simply declared, but not yet paid out by the end of a company’s accounting period, where will it be recorded?

Answer 14

only appear on the statement of equity, but not actually taken into account in the balance sheet

Question 15

What are a company’s retained earnings?

Answer 15

profits carried forward from that year