Business accounts Flashcards
Financial statements prepared in respect of each accounting period
- profit and loss account
- balance sheet
Principles of double entry book-keeping
There are two entries!!
Debit entry
Credit entry
Trial balance
A list of all the balances on all of a business’s ledgers/accounts as at the end of an accounting period.
Trial balance shoes debit balances in one column and credit balances in another column. Total of the two columns should be the same (and balance)
ALCIE
Asset
Liability
Capital
Income
Expenditure
Fixed/non-current assets
Fixed asset:
must be held by the company for over a year and provide long-lasting benefits to the company.
Current assets
Assets which are continually flowing through the business:
- stock
- debtors
- cash
Current liabilities
- bank overdraft
- trade creditors
Long-term/non-current liabilities
- term loan
- falls due after more than one year
Capital
Money invested and includes retained profits
Expense accounts
Records day to day spending.
Does not include spending on long-term assets.
Income accounts
Record sums received by the business such as payments from customers in relation to sales.
Year-end adjustments
Adjustments
e.g. where there are prepayments for services in next accounting year
Profit and loss account
Records the income and expenses of a business to arrive at a profit (or loss) figure for that period.
Income entries from trial balance are at the top of the profit and loss account.
Added together for gross profit.
minus expenses
get net profit
Formula for costs of sales
Opening stock + purchases – closing stock = cost of sales
What is a balance sheet
A record of the position in respect of its assets, liability and capital accounts from the trial balance.
It is a ‘snapshot’ relevant on a given date.
Top half of the balance sheet
Net worth or net asset value of the business
Will be the same as the bottom half
(assets and liabilities)
Bottom of the balance sheet
Capital invested in the business
Will be the same as the top half
(capital)
Partnership accounts
- each partner will have a capital and current account
- partners will take ‘drawings’ out of profits
- surplus profits are distributed as:
- interest on capital
- ‘salaries’
- remaining profits to agreed profit sharing ration
- Must draw up a profit appropriation statement before balance sheet is drawn up
What is a profit appropriation statement?
A profit appropriation statement is a way of working out the distribution of profits in a partnership.
Company accounts: bottom half of the balance sheet
Shows ‘total equity’/’equity reserves’:
Capital consists of:
- share capital
- reserves
- retained earnings
Statement of equity/Statement of changes in Equity
An addition to the balance sheet which shows profits brought forward plus current year profit (less dividends paid).
How do companies’ financial statements deal with tax
The Profit and Loss Account of a company includes a statement of the tax the company should pay on its profits.
What is the impairment of receivables on a company balance sheet?
The provision for doubtful debts.
Called up share capital
Shows how must of the share capital has been ‘called-up’.
Amount of the nominal value of the shares that the company has required its shareholders to pay.
Revaluation reserve
Created when a company’s directors as a matter of policy wish to show more up to date values of non-current assets in the accounts.
Represents a notional profit to the company from the rise in value of the asset. This profit is not realised until the asset is sold which is why it is a reserve and not distributable as a dividend until the company sells the asset.
Share premium account
Represents the difference between the nominal value of the shares and the amount that the shareholders actually paid for the shares ie subscription.
What are retained earnings?
Retained earnings is the reserve account for retained profits.
Statement of Changes in Equity
Appended to balance sheet
Shows the retained earnings:
- brought forward
- profit from the year
- dividends paid
Retained earnings now
Dividends
Are paid or payable out of profits generated in the current or previous accounting period.
Any company can make one if it has profits available.
Affects the capital section so shows up in SoCiE and does not belong on a Profit and Loss account.
Final and interim dividends
Final dividend: declared after the year end and paid some time thereafter
Interim dividend: paid during, and in respect of the current accounting period
Process for final dividend
Final dividend is recommended by the company’s directors in the Directors’ Report and declared by the shareholders by ordinary resolutions.
Until OR - proposed dividend
After OR passed - declared dividend
Declared dividend is a debt of the company to the shareholders and is enforceable.
Interim dividend process
Totally at discretion of directors.
Unpaid interim dividend not a debt shareholders can sue on.
Interim dividends only in accounts if actually paid.
