Business Accounts Flashcards
What financial statements are prepared in respect of each accounting period?
- Balance sheet
- Profit and loss account
What is a nominal ledger?
A place where transactions of a similar type are recorded e.g. sale of stock, wage payments
Several different ledgers (accounts) collective name is books
What is the principle of doube entry book-keeping?
The sum of a business’ debts should be equal to the sum of all its credits over the relevant accounting period
What is the trial balance?
A list of all balances on all of a business’ ledgers/accounts at the end of an accounting period
Debits in one column, credits in another
What is ALCIE?
Refers to the things every entry on trial balance sheet can be characterised as:
- Asset (owned by business)
- Liability (owed by business)
- Capital (injection of value from owner/investor)
- Income (earned by business)
- Expense (spent by business)
Each type of asset will be recorded in separate accounts…
* Theatre might record income from ticket sales and from venue hire in separate accounts
Difference between fixed (non-current) and current assets?
Fixed = held by company over a year providing long lasting benefit
Current = cash; can be quickly turned into cash (within one year)
Current is continually flowing through business
Difference between current liabilities and long-term (non-current) liabilities)?
Current liabilities = due to b e paid within a year
Non-current liabilities = falling due after one year
What does ‘drawings’ refer to in a sole trader’s account?
Transactions between business and owner; owner pays himself a salary by drawing profits
What is a profit and loss account?
AKA income statement
Records income of a business minus expenses incurred throughout accounting period
Are assets included in the profit and loss account?
No! Only day-to-day income and expense entires e.g. sales
What is the difference between gross profit and net profit?
Gross = all income of a business less the cost of sales
Net = gross profit less expenses of business
How is cost of sales calculated?
Opening stock + purchases - closing stock
Both asset accounts; exceptions to the rule that P+L only shows income/expense accounts
What is the balance sheet?
Snapshot of asset, liability and capital accounts from trial balance
What are the two key things a balance sheet tells the reader?
- Net asset value (NAV) - top half
- The capital invested in the business (to achieve that worth) - bottom half
Will always be the same; they balance
This is because the top half of balance sheet demonstrates how the money by the owners has been used
What is the net worth/net asset value?
The value of assets a business has less the liabilities it owes
What are year-end adjustments?
Transactions/modifications to the account entries on the trial balance
- All income matched to relevant accounting period
- Liabilities/asset values must be assessed to make sure they can be recovered through future profits in conditions of uncertainty
What are the 5 types of year-end adjustments?
- Depreciation
- Accruals
- Prepayments
- Bad debts
- Doubtful debts
What is depreciation? (YAE)
Deals with decline in value and spreads cost of asset over useful life
If not used = accounts stated at cost value well above actual value
2 methods
What are the two depreciation methods and how do you decide which is used?
- Straight-line method (e.g. shelving)
- Reducing balance method (e.g. van)
Chosen based on how asset loses value and how it produces revenue for business on ongoing basis
Amount known as the charge to depreciation/depreciation charge
What is the straight-line method?
Spreads depreciation charge evenly; same charge for depreciation each year
What is the reducing balance method?
Depreciation charged expressed as a % of the reducing balance (net book value of asset at start of relevant accounting period)
More depreciation in earlier years - less in later years
What is the net book value?
The cost - accumulated depreciation = net book value (estimate of current value of asset to the business)
When does an accrual arise?
Expense has been incurred which should be deducted from (charged against) profit in current year but has not been included in the trial balance
Acc 💅 not paying for that yet!
Business has the benefit of something in one accounting period but will not pay for it until next
How is an accrual shown on P+L and balance sheet?
Use example:
E.g. X uses legal services of B - preliminary trial balance of £27,000 in legal fees account - X has not received £5,000 bill for work done a month ago - trial balance will show £27,000 when it has actually used £32,000.
- Figure of £32,000 must be included in legal fees expense account on P+L
- £5,000 owed must be included as an accrual current liability account on balance sheet
As a result of accrual^
When does a prepayment arise?
When an expense is paid for in the current year but all/part of cost should be charged as an expense next year
Paid for something in advance during one accounting period but does not get benefit of all/some of what it has paid for until the next
How is a prepayment shown on P+L and balance sheet?
Use example:
E.g. Z pays £30,000 in rent on 1 October for 12 months in advance - Z has accounting year end of 31 December - trial balance shows that Z has paid £30,000 of rent in accounting year but should only be paying rent for 3 months from October (equal to £7,500)
The figure of £22,500 is the amount that Z has prepaid in rent so…
- Correct figure of £7,500 shown in rent expense on P+L
- £22,500 (prepayment amount) will be shown in prepayment current asset account creatred on balance sheet
As a result of prepayment^
How do profits appear if an adjustment for accrual or prepayment is not made?
- Accrual not made = Profit is artifically high
- Prepayment not made = Profit artifically low
What does the ‘receivables’ (‘debtors’) figures show?
Amount of money owed to the business
Business can look forward to receiving it
What is a bad debt? What happens when there is a bad debt?
A debt that a business knows it certainly will not receive - bad debt is written off and removed from receivables entry in accounts
Also referred to as ‘impairments’
If a bad debt is not written off, what will appear to be the case?
Seems business is expecting more money to be paid in than is actually the case
E.g. X has receivables balance of £7,000 - bankrupt customer owes £360 - receivables balance must be reduced to £6,640
When does a doubtful debt occur?
When a business provides for the possibility that a debt may not be paid
Not writing off completely; just making sure accurate reflection
How is the provision for doubtful debts shown on the balance sheet?
Shown as a liability, specifically a reduction to the Receivables account (matched to the asset it directly affects)
What is the share premium account?
Represents the difference between the nominal value of the shares and the amount that shareholders actually paid (the subscription price if greater)
As in card above - cannot be distributed to shareholders
Do dividends belong in the profit and loss account?
No! They are transactions between the business and its owners so will show up in the SoCiE
How is a final dividend recommended and declared (approved)?
- Directors recommend in Director’s Report
- Shareholders declare (approve) by ordinary resolution
But declaration not complete until OR
Dividends example
How are preference share dividends paid and how is their amount calculated?
Two instalments each year - amount of dividend already known due to their nature
