Business Accounts Flashcards
What does a profit and loss account do?
The profit and loss account records the income of a business throughout an accounting period minus expenses incurred in that period, to arrive at a profit or a loss figure for the period.
What is a profit and loss account?
It is a summary of the fortunes of a business over a passage of time.
According to international accounting standards, what may the profit and loss account also be referred to?
An income statement.
What is the label for the final figure at the end of a profit and loss account?
Net profit.
What is the formula to calculate the cost of sales figure on a profit and loss account?
Opening stock + purchases - closing stock = cost of sales.
A balance sheet will record the position of a business in respect of what accounts from the trial balance?
Asset, liability, and capital accounts.
What will the date at the top of a balance sheet be?
The last day of the accounting period to which it relates.
What two key things does a balance sheet principally tell the reader?
The net worth or net asset value (NAV) of the particular business. Recorded in top half of balance sheet.
The capital invested in the business to achieve that net worth. Recorded in bottom half of the balance sheet.
What is the formula for calculating the net asset value (NAV)?
Fixed assets (net book value) + net current assets - long term/ non current liabilities = NAV.
What is the formula for calculating the net current assets of a business?
Current assets - current liabilities = the net current assets of a business.
What are year-end adjustments?
Year-end adjustments are transactions or modifications to the account entries on the trial balance.
What are year-end adjustments?
Year-end adjustments are transactions or modifications to the account entries on the trial balance.
What are year-end adjustments needed for?
They are needed in order to apply the accruals/matching concept to the preparation of financial statements.
What does the concept of accruals/matching require?
All income and expenditure must be matched to the relevant accounting period;
And
All current obligations must be anticipated as liabilities and all asset values must be assessed to make sure they can be recovered through future profits in conditions of uncertainty.
What are the five year-end adjustments?
- Depreciation
- Accruals
- Prepayment
- Bad debts
- Doubtful debts
What is depreciation?
Depreciation is a mechanism used in the accounts to deal with the decline in value and to spread the cost of the asset over its useful life.
What are the two methods of depreciation?
- The straight-line method.
- The reducing balance method.
What does the straight-line method do?
When is it used?
Spreads the depreciation charge evenly over the life of the asset and give rise to the same charge for depreciation each year.
It is used where the service provided by the asset continues throughout its useful economic life on a consistent basis.
If plotted on a graph, the depreciation of the asset would form a straight line.
What does the reducing balance method do?
When is it used?
The depreciation charge each year is expressed as a percentage of the reducing balance. More depreciation is this charged in earlier years than in later years since the net book value of the asset reduces year on year.
This method is less common, but used where an asset is likely to lose a large part of its value in the first few years of ownership .
If plotted on a graph the depreciation of the asset would form a curved line.
When does an accrual arise?
An accrual arises when an expense has been incurred and should be charged against profit in the current year
