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Business Accounts Flashcards

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1
Q

What do accounting records list?

A

All of the businesses’ transactions i.e. sales to customers, purchases from suppliers. These should be supported by an invoice, receipt etc

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2
Q

When will a business need to produce copies of their accounts?

A

A business will need these accounts if they apply for a loan, for HMRC to assess tax, or if the company is to be audited by Companies House

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3
Q

Who maintains business accounts and how?

A

Accounts are usually maintained by an accountant. There are domestic and international rules and a standardised format to adhere to. These are not legally binding

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4
Q

What are the similarities and differences between incorporated and non-incorporated business accounts?

A

Both use general accounting principles i.e. double-entry book keeping, final accounts etc but LLPs and company’s have additional requirements

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5
Q

What system do businesses use to record transactions and how does this work? Give an example

A

Businesses must record each transaction as it occurs and most do so using the double-entry bookkeeping system.

The business will have separate accounts for different types of transaction i.e. income, expenses, assets, liabilities

Each transaction will debit one account and credit another. The transaction is recorded accordingly in each account.

A credit is an entry that increases a liability account or decreases an asset account

A debit is an entry that increases an asset account or decreases a liability account

Debits are on the left, and credits are on the right

e.g. if a business takes out a loan, this would be a debit in the asset account and a credit in the liability account. Or, if something was paid using credit, this would be a debit in the asset account and credit in the liability account

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6
Q

When is a trial balance prepared?

A

A ‘trial balance’ is prepared before the businesses’ final accounts

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7
Q

How is a trial balance prepared?

A
  • The credits and debits in each account will be totalled to create a closing balance for that specific account
  • The closing balance from each account will then be transferred to the trial balance and added together
  • The figures from the trial balance are then used for the final accounts
  • If there has been no error in the double-entry book system, then the credits and debits should be equal
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8
Q

What is an an adjusted trial balance?

A

Transactions are recorded as they occur, and so the trial balance will record the total of transactions that have actually taken place. However, this isn’t always an accurate reflection of the business accounts and so final accounts are produced on an accrual basis. The trial balance therefore needs to be adjusted to reflect these accrued payments.

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9
Q

What is meant by the accrual basis?

A

This means income and expenses that have taken place in the accounting period will be recorded in the final accounts, even if the business hasn’t yet received payment

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10
Q

When are the final accounts produced and what is another name for them?

A

Also called the annual accounts, these are produced at the end of the account period.

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11
Q

What do the final accounts consist of? What is the basis of the accounts?

A

The final accounts consist of a profit and loss account and balance sheet (and possibly a trading account)

These accounts are prepared on the basis of the trial balance and adjusted trial balance

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12
Q

Which business need to have a trading account?

A

Only businesses that buy and sell goods also need to have a trading account. If the business has a trading account, this will be the top section of the P&L account.

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13
Q

What does a trading account show? What are the calculations?

A

The trading account records the sales, purchases, opening and closing stock to show the gross profit.

income from sales – cost of buying stock* = gross profit

*Cost of buying stock = purchases + opening stock – closing stock

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14
Q

What does a profit and loss account show? What is the calculation?

A

This shows how profitable the business is (i.e. the net profit). The P&L account only includes income and expenses, not assets and liabilities.

Calculation: income – expenses = net profit

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15
Q

What does the balance sheet show?

A

This shows the value of the business on the last day of the accounting period. Therefore, it is only a snapshot and could change the next day.

It only includes what is owned or owed at that specific point in time.

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16
Q

What structure does a balance sheet take?

A

It has two halves:
1. employment of capital
2. capital employed

Both halves will always be equal

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16
Q

What is employment of capital and what does this section record?

A

i.e. where the money is now:
Assets (listed in order of liquidity from hardest to easiest)
* Fixed assets i.e. premises, plant and machinery
* Current assets i.e. short term assets like stock, cash, debtors

Liabilities
* Short term liabilities - repayable in 12 months of less (i.e. invoice to supplier, overdraft)
* Long-term liabilities - repayable in more than 12 months (i.e. bank loan)

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17
Q

What are the key calculations in relation to the balance sheet?

A
  • Current assets – current liabilities = net current assets
  • All assets – all liabilities = net assets (also called net worth of business)
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17
Q

What is capital employed and what does this section record?

A

i.e. where the money came from:
 Opening balance = money put into the business since they started the business
 Net profit = the figure from the P&L account
 Drawings = a business will have a drawings account if they have withdrawn money. This figure is deducted from opening balance & net profit.

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18
Q

What does net current assets show?

A

The liquidity of the business

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19
Q

What will net assets be equal to?

A

the total capital of the business (because the top and bottom half of the balance sheet are always equal)

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20
Q

What are examples of fixed assets recorded on the balance sheet?

A

premises, machinery

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21
Q

What are examples of current assets recorded on the balance sheet?

A

stock, debtors, cash

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22
Q

What are examples of current liabilities recorded on the balance sheet?

A

creditors, bank overdraft

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23
Q

What are examples of long term liabilities recorded on the balance sheet?

A

bank loan

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24
Q

What capital employed is recorded on the balance sheet?

A

opening balance, net profit, drawings

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25
Q

re adjustments:

What are outstanding expenses and where are they recorded?

A

i.e. unpaid bills
 P&L account - expenses
 Balance sheet - current liability, labelled as ‘accrual’

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25
Q

What common adjustments are made to the final accounts?

A

o Outstanding expenses
o Pre-payments
o Work in progress
o Closing stock
o Bad debts
o Doubtful debts
o Depreciating items
o Disposing of assets

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26
Q

re adjustments:

What are pre-payments and where are they recorded?

A

i.e. something the business has paid in advance but the won’t receive the benefit until next year, such as rent
 P&L account - expenses
 Balance sheet - current assets, labelled as ‘pre-payment’

27
Q

re adjustments:

What are ‘works in progress’ and where are they recorded?

A

i.e. work which has been carried out but not yet submitted a bill for
 P&L account - income (under profit costs)
 Balance sheet - current assets

28
Q

re adjustments:

What are bad debts and where are they recorded?

A

i.e. a debt owed to the business that cannot be recovered
 P&L account - expenses
 Balance sheet - will be removed from the balance sheet

28
Q

re adjustments:

What is closing stock and where is this recorded?

A

i.e. stock at the end of the accounting period
 Balance sheet - current assets

29
Q

re adjustments:

What are doubtful debts and where are they recorded?

A

i.e. a debt owed to the company with a high risk of non-collection
 P&L account - expenses under ‘provision for doubtful debts’
 Balance sheet - deducted from debtors figure

30
Q

re adjustments:

What are depreciating items and where are they recorded? How is this recorded?

A

o i.e. items that depreciate in value like cars, machinery.
 P&L account - expense
 Balance account - deducted under fixed assets

The figure used is the value of the depreciation. This is amount is usually determined as a % of the value of the asset.

If an item does not depreciate, its acquisition value is used

If an item is re-valued, the valuation figure is used

31
Q

re adjustments:

When assets are disposed of, how and where are they recorded?

A

P&L account - if asset sells for more than book value, it will be recorded as income (profit). If it sells for less, it will be recorded as a reduction of net profit

book value = cost of the asset – depreciation

32
Q

When analysing accounts, what are the things to look for?

A

o Is the balance sheet up to date? Has it been distorted by a seasonal boost?
o Have valuations been carried out recently?
o Damaged stock will sell for less.
o Liquid assets i.e. assets which can be easily covered into cash to pay debts (under current assets on the balance sheet)

33
Q

in relation to partnerships and LLP accounts, how is the P&L account different to a normal P&L account?

A

Only salaries payable to employees are recorded as an expense, not salaries of partners. Salaries to partners are accounted for in the appropriation account.

34
Q

What additional account do partnerships and LLPs have?

A

o Appropriation account
o Capital and current accounts

35
Q

What does an appropriation account show?

A

This shows how the net profit (which is calculated by the P&L account) is divided between the partners, after deducting salary, interest on capital etc

36
Q

What are capital and current accounts?

A

Each partner will usually have their own separate current and capital accounts
o Current account - shows the appropriation of net profits (i.e. salary, interest and profit they will receive) and any drawings they take
o Capital account - the sum of their initial capital contribution

The partner’s total capital is the sum of the balances on their capital account and current account. It is convenient to be recorded separately for the purposes of the balance sheet.

36
Q

If a partner leaves part way through an accounting period, how does this affect the appropriation account?

A

If a partner leaves or joins part way through the accounting period, then the net profit will be apportioned between the period before and after the change and then there will be an appropriation account for each timeframe

37
Q

What obligations do companies have in relation to their accounts? What is the position in relation to groups of companies? What is the position in relation to micro, small and medium companies?

A

All companies must keep ‘adequate accounting records’ and produce reports and statements at the end of the financial year which comply with certain requirements.

With groups of companies, each individual company must prepare its own accounts and the parent company must prepare a consolidated account

Accounting requirements are less onerous for micro, small and medium companies (but they must still comply with the above)

38
Q

in relation to partnerships and LLP accounts, how is the balance sheet different to a normal balance sheet?

A
  • It records the capital and current for each partner
  • An appendix setting out the movements of the current account is appended to the balance sheet
39
Q

How must a company prepare its accounts? What is the effect of this?

A

A company must prepare ‘individual accounts’, which must be prepared in accordance with either:
o Companies Act Individual Accounts under s396; or
o International Accounting Standards Individual Accounts.

The effect is that companies must produce a P&L account and balance sheet and it will comply with UK (FRS102) and international Financial Reporting Standards (IFRS) respectively. Both require figures from the last financial year and this financial year to be shown side by side.

40
Q

What does FRS102 stipulate?

A

it states the information that must be included on the accounts and provides a template.

41
Q

What terminology is used on an FRS102 balance sheet?

A

Fixed assets / long-term liabilities
Debtors / creditors
Closing stock
Debentures

42
Q

What does IFRS stipulate?

A

just states the minimum information required.

43
Q

What terminology is used on an IFRA balance sheet?

A

Non-current assets / non-current liabilities
Receivables / payables
Inventories
Loan notes

44
Q

Once a company’s accounts have been prepared, what happens?

A
  • The accounts will need to be approved by directors. They can face criminal and civil liability for untrue statements in the accounts
  • The final accounts and reports must be filed with the ROC and sent to anyone who is entitled to receive notice of a GM (i.e. SHs, debenture holders)
45
Q

Do companies need to have their accounts audited?

A

Companies will need to have their accounts audited unless they are a small or dormant company.

SHs with more than 10% SH can require the accounts to be audited

46
Q

What is the alternative name for a FRS102 company profit and loss account?

A

Income statement

47
Q

What is not recorded on a company profit and loss account?

A
  • Payment of dividends is not recorded on the P&L account
48
Q

How is an FRS102 company profit and loss account different to a standard profit and loss account?

A
  • Directors’ salaries are included under expenses (unlike partnerships)
  • It will include an estimate of corporation tax and show the net profit before and profit after tax
    o Sales are called turnover
    o Clearly shows gross profit from sales and profit from operating activities
    o Expenses are grouped together and called ‘Administration Expenses’ (a breakdown of expenses will be appended)
49
Q

Why do the directors need to analyse the accounts?

A

To consider the health of the business generally, but specifically because they make a recommendation as to payment of dividends.

Directors will need to make sure that there is enough money in the business to pay expenses and run the business. They will also need to consider that not all of the profit will be payable cash (i.e. debtors).

50
Q

What is a profit and loss reserve?

A

Any profit left after tax and dividends have been paid is retained profits that go back into the business, or additional dividends could be given to SHs and called a ‘profit and loss reserve’

51
Q

How is a company balance sheet different to a standard balance sheet?

A

o The ‘employment of capital’ section is called ‘assets’
o The ‘capital employed’ section is called ‘capital and reserves’. The capital and reserves are added together to show the SHs funds, which is equal to net assets
o Current liabilities are called ‘amounts falling due within 1 year’.
o Long-term liabilities are called ‘amounts falling due after more than 1 year’
o There is a ‘total assets less current liabilities’ which shows the value of the business before taking into account long-term liabilities

52
Q

How is tax recorded on the balance sheet?

A

the ‘provision for tax’ tax estimate from the P&L account would be recorded under ‘amounts falling due within 1 year’

when the tax is paid, it is removed and the cash amount will be reduced to reflect it has been paid

53
Q

What is recorded under the capital section of a company balance sheet?

A
  • This will record any money that has been paid in return for shares
  • All types of share the company has issued will be on the balance sheet
  • The shares’ nominal (/par) value will be recorded. Any premium paid will be record separately on the share premium account, but the value will feature on the balance sheet
54
Q

What is recorded under the reserves section of a company balance sheet?

A

This shows the money that would be paid to SHs if the company were to be wound up, after liabilities had been paid

55
Q

What are the two types of reserves?

A

o Capital reserves i.e. cannot be distributed to SHs
o Revenue reserves i.e. can be paid to SHs

56
Q

What are capital reserves?

A

money which cannot be distributed to SHs, i.e.;
 Share capital
 Share premiums

57
Q

What are revenue reserves?

A

money which can be paid to SHs, i.e.:
 Profit and loss reserve – retained profit is added to this each year, so it will continue to grow each year profit is retained.
 Other revenue reserves might be labelled, so it is clear why it has been reserved and not paid to SHs, i.e. ‘debenture redemption reserve’. Even though it may be labelled, it is important to know that it is still retained profit.

58
Q

How will share transfer affect a company balance sheet?

A

will not alter balance sheet as no change to the number of shares

59
Q

How will share issue affect a company balance sheet?

A

the company will receive money so ‘cash’ will increase and so will ‘share capital’

60
Q

How will a loan affect a company balance sheet?

A

the company will receive money so ‘cash’ will increase, but this is also an increase in liability so it will be recorded here. This will not change the overall net assets.

61
Q

What other reports do companies need to prepare?

A
  • Strategic report
  • Chair’s report (not obligatory)
  • Directors’ report
  • Auditors’ report
  • Explanatory notes to accompany P&L account and balance sheet
62
Q

What is a strategic report?

A

review of company’s business. Designed to measure and assess performance. Small companies exempt.

63
Q

What is a chair’s report?

A

not a strict requirement. Explains what has happened over the financial year. Will put company in a good light so is not objective.

64
Q

What is a director’s report?

A

contains factual information about the company and confirmation that auditors have been given the relevant information. Requirements under CA 2006.

65
Q

What must the auditors’ report state?

A

auditors must state whether the accounts give a true and fair review.

Business Law & Practice (17 decks)

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