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Business Law and Practice > Business Accounts > Flashcards

Business Accounts Flashcards

1
Q

What financial statements must be prepared each accounting year?

A
  • a profit and loss account
  • a balance sheet
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2
Q

What is the trial balance?

A

The trial balance forms the basis of the information from which the financial statements (profit and loss account and balance sheet) are then compiled

It shows debit balances in one column and credit balances in another column. The total of each should be the same so balance

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3
Q

What are the five different accounts entry on the ledger might relate to? (ALCIE)

A
  • assets - something the business owns (motor vehicles, cash at bank)
  • liability - something the business owes (loans, trade debts)
  • capital - identifiable as an injection of value from an owner or investor rather than money generated by the business
  • income - money earned by the business usually from a regular source
  • expense - money spent by the business (heating and lighting, wages paid to employees)
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4
Q

What are fixed assets?

A
  • Any asset tangible (such as buildings) or intangible (such as a trademark) owned by the business that will enable it to make a profit
  • must be held by the company for over a year and provide some long-lasting benefit to the company
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5
Q

What is a current asset?

A
  • assets that’s are continually flowing through the business so have a shorter-term nature

Include:

  • stock (goods for either use and/or resale) also known as inventory
  • debtors also known as receivables, who owe money to the business
  • cash, including bank account cash and cash in hand
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6
Q

What are liabilities?

A
  • amounts owed by the business to someone else
  • current liabilities (those due within one year)
  • long-term liabilities (those due after one year)
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7
Q

How are the assets of the sole trader treated differently for accounting purposes than they are in law?

A

Despite not having separate legal personality, for accounting purposes the business and its owner are seen as two separate entities

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8
Q

What is an expense account?

A
  • Expense account is where day to day spending is recorded
  • will record services or purchase of items that it will not hold for a very long time before it uses them up
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9
Q

What does the income account record?

A

Records sums received by the business

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10
Q

What is the purpose of year-end adjustments?

A

Ensure that all income and expenditure on the final financial statements relate only to the relevant accounting period

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11
Q

What does the profit and loss account record?

A

Essentially records the income of a business throughout an accounting period minus expenses incurred in that period to arrive at a profit (or loss) figure for the period

It is a summary of the fortunes of a business over a passage of time

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12
Q

What does the balance sheet record?

A

It records the position of a business in respect of its asset, liability and capital accounts at a particular date

It is a snapshot of the business on a given date - last day of accounting period

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13
Q

What are the two key things a balance sheet tells the reader?

A
  • the net worth or net asset value (NAV) of a particular business (ie value of the assets it has, less the liabilities it owes). This is recorded in the top half of the balance sheet
  • the capital invested in the business to achieve that net worth. This is recorded in the bottom half of the balance sheet
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14
Q

Why will the two halves of the balance sheet always balance?

A

The top half of the balance sheet demonstrates how the money invested by the owners of the business has been used and the bottom half shows the amount of money invested by the owners

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15
Q

What is depreciation in an accounting context?

A

It is a mechanism used to deal with the decline in value of an asset and to spread the cost of the asset over it useful life

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16
Q

What are the two methods of calculating depreciation?

A
  • the straight-line method
  • the reducing balance method
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17
Q

What is the straight line method of calculating depreciation?

A

Method spreads the depreciation charge evenly over the life of the asset and gives rise to the same charge for depreciation each year

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18
Q

What is the reducing line balance method of calculating depreciation?

A

Depreciation charge each year is expressed as a percentage of the reducing balance (ie the net book value of the asset at the start of the relevant accounting period

(When plotted on a graph it would form a curved line)

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19
Q

What is the net book value?

A

Net book value = original cost less accumulated depreciation

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20
Q

What is an accrual and what must be done in respect of year-end adjustments?

A

Accrual arises when expense has been incurred and should be charged against profit in the current year but for some reason expense not included in the trial balance

Adjustment will have to be made to take into account accrual in accounting period otherwise profits of business will be shown as artificially high

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21
Q

What is a prepayments and what must be done in respect of year-end adjustments?

A

Prepayment arises when an expense if paid in the current year but all or part of the cost should be charged as an expense for the next year

If business has paid for something but not yet received the benefit, then profit will be artificially low so adjustment needs to be made to give true reflection of accounts

22
Q

What is a bad-debt?

A

A bad debt is one which the business knows with certainty that it is never going to receive

23
Q

What must be done with bad-debts in respect of accounting process and year-end adjustments?

A

Bad-debt must be removed from receivables entry in the accounts as it will not be paid

Bad-debts may be written-off during the accounting year or at year-end adjustments when reviewing of debts owed to business is conducted

24
Q

What are doubtful debts?

A

Doubtful debts occur when a business is providing for the possibility that a debt or debts may not be made

25
Q

What is the effect of debts being deemed doubtful debts?

A

They are not written off completely like bad debts but are reflected in the accounts to accurately reflect the fact the business may not receive all the money owed to it

26
Q

What are the two ways of debts being classified as doubtful?

A
  • specific doubtful debts - business may know that a particular debtor is in trouble financially or is disputing liability to pay but business has not given up hope of receiving the money
  • general doubtful debts - business may not have any information on a specific debtor but knows the market generally is not doing well so makes general provision for a certain percentage of its debtors not to pay what they owe, eg estimates the 5% of receivables will not be paid
27
Q

How are doubtful debts treated in the profit and loss account?

A

Accounted for in the same expense account as bad debts as they may in future be written off as a bad debt

Only the increase in the provision of doubtful debts compared with last year’s provision is shown in the expense account

28
Q

What are drawings in partnership accounts?

A

Withdrawals by partners during the year to pay themselves

29
Q

Within a partnership, what accounts will each partner have?

A
  • capital account - for long-term capital (represents partner’s original and subsequent investments in the partnership) and cannot normally be withdrawn
  • current account - capital that can be withdrawn at the partner’s discretion, records the partner’s share of outgoing business profits and any drawings over the year
30
Q

How are profits divided amongst the partners?

A

1) sums are allocated to each partners corresponding to any interest on their capital or salaries due to each of them under the partnership agreement

2) remaining profit will be distributed to the partners according to an agreed profit share ratio

31
Q

What is the notional interest on capital received by partners and how should it be treated in the accounts?

A

Payment representing interest on the capital in the partner’s long-term capital account

Should not be treated as an expense item in the profit and loss account - really appropriation of profit by different name

32
Q

How should the notional salary of partners be treated in the accounts?

A
  • must be treated as an appropriation of profit, not an expense in the profit and loss account (as salaries of employees are) and
  • will be treated as drawings
33
Q

How is the accounting reference date for companies decided?

A
  • by default in statute it is the last day of the month in which the anniversary of its incorporation falls
  • company can change it to whatever day it likes
34
Q

When must a private company file its accounts at Companies House by?

A

Within 9 months after the end of the relevant accounting reference period

35
Q

When must a public company file its accounts at Companies House by?

A

Within six months after the end of the relevant accounting period

36
Q

What are the main difference in accounts for companies compared to sole traders and partnerships?

A
  • bottom half of balance sheet will include share capital, reserves and retained earnings
  • tax - profit and loss account will show statement of tax company should pay on its profits
  • dividends - dividends will usually appear in a financial statement called the statement of equity
37
Q

What special rules apply to groups of companies?

A

Companies with one or more subsidiary obliged to publish accounts for group of companies as a whole, as well as their own annual accounts

38
Q

What does the share capital account record?

A

The aggregate amount that has been called up on each class of issued shares, not including any premium

39
Q

What are reserves and what types of reserves does a company have?

A
  • capital of the company in excess of the called up value of the issued share capital
  • capital reserves (share premium account, revaluation reserve, capital redemption)
  • revenue reserves (retain earnings)
40
Q

Can capital reserves be distributed by dividends or other payments to shareholders?

A

Broadly speaking no

41
Q

What is the share premium account?

A

Represents the difference between the nominal value of the shares and the amount that shareholders actually paid for them ie the subscription price

42
Q

What is revaluation reserve?

A

Created when a company’s directors as a matter of accounting policy wish to show more up to date values of non-current assets in the accounts

Represents a notional profit to the company from rise in value of asset but profit will be unrealised until asset is sold so capital reserve and not distributable as a dividend

43
Q

What are retained earnings?

A

Reserve account for retained profits ie profits after tax earned by the company over its history and not distributed by way of dividend or appropriated to another reserve

44
Q

Where is profit for the year carried over to?

A

Carried over into separate calculation called statement of change in equity

45
Q

What are dividends payable out of?

A

Distributable profits generated in the current or previous accounting periods

46
Q

What is the difference between a final and interim dividend?

A
  • final dividend is declared after the year and paid some time thereafter
  • an interim dividend is paid during and in respect of the current accounting period
47
Q

What is the process for paying out a final dividend?

A

Company’s directors recommend dividend in the Directors’ Report and declared by the company’s shareholders by ordinary resolution

48
Q

When does a final dividend become an enforceable debt on the part of the shareholders?

A

Only after they have approved it by ordinary resolution - becoming declared divided

Before that just a proposed dividend

49
Q

How are interim dividends paid out?

A

Model Articles of a company give directors the power to pay interim divided without shareholder approval

Interim divided declared by board resolution is not enforceable debt for shareholders

50
Q

When will interim dividends appear in the accounts?

A

When they have been paid

51
Q

What happens to any profits after tax that have not been paid out to shareholders as dividends?

A

They are retained in the company and will appear as retained earnings

Business Law and Practice (22 decks)

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