Business accounts Flashcards
What is a trial balance?
A trial balance is a list of all the balances on all of a business’s ledgers/accounts as at the end of an accounting period.
Define the ALCIE accounts:
Asset-something a business owns.
Liability-something a business owes.
Capital-usually identifiable as an injection of value from an owner or investor.
Income-money earned by the business.
Expense-money spent on overheads.
What is a fixed asset?
A fixed asset is any asset, tangible or intangible, owned by a business that will enable it to make profit. It must be held by the company for over a year and provide some long-lasting benefit.
What is a current asset?
Current assets include cash and items owned by a business which can quickly be turned into cash within one year.
What is a current liability?
An amount owed by the business to somebody else, due to be paid within a year.
What is a long-term liability?
An amount owed by the business to somebody else, falling due after one year.
What does the contents of a balance sheet reveal?
Net worth or net asset value of the business-top half of balance sheet
Capital invested to achieve that net worth-bottom half of balance sheet
What are year-end adjustments?
Transactions or modifications to the account entries on the trial balance.
What is the accruals/matching concept?
This concept requires that:
-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 is depreciation?
Depreciation is a mechanism used in the accounts to deal with the decline in value of a fixed asset over several years, in order to spread the cost of the asset over its useful life.
Outline the straight-line method of depreciation and when it is used.
An asset such as shelving will use the straight-line method because the asset is being used up consistently over its lifespan and generating a consistent amount of income.
-spreads the depreciation charge evenly over the lie of the asset; and
-gives rise to the same charge for depreciation each year
This asset is used where the service provided by the asset continues through its useful economic life on a consistent basis.
Outline the reducing balance method of depreciation and when it is used.
An asset such as a van, will produce much more revenue for the business in its earlier years of use and will tend to lose a large part of its value at this time hence the reducing balance method will be more relevant.
-the depreciation charge each year is expressed as a percentage of the reducing balance (ie the net value of the asset at the start of the relevant accounting period)
-more depreciation is thus charged in earlier years than in later years as the value of the asset reduces year on year
What is an accrual?
An accrual occurs when a business has had the benefit of something in one accounting period but will not pay for it until the next. Making an adjustment in this way complies with the accruals/matching concept.
Where will accruals appear on the profit and loss account?
As an expense in the appropriate account and it will appear on the balance sheet as a current liability.
What is a prepayment?
Prepayments occur when a business has paid for something in advance during one accounting period but does not get the benefit of all or some of what it has paid for until the next.
