business accounts Flashcards
what are business accounts
business create final accounts at the end of the accounting period.
what do final accounts comprise of?
balance sheet and profit and loss account
what is income
trade and services income e.g. goods sales
what are expenses
items of expenditure for short term benefit i.e Petrol, wages
what are assets
items owned outright usually for short term e.g. machinery
what are liabilities
items the business owes to third parties i.e loans
what is the trial balance?
final accounts are prepared using the trial balance. this is the total of all debts and credits throughout the year and if correct should balance to 0
what is the profit and loss account?
the profit and loss account demonstrates the net profit for the year.
businesses may identify how to increase profit and reduce loss.
how to calculate net profit
INCOME - EXPENSES
what is the trading account?
shows gross profit.
SALES INCOME - COSTS OF TRADING STOCK = GROSS PROFIT
what is the balance sheet?
balance sheet shows the net worth of the business as an accumulation of assets and liabilities not he final day of the account period headed with the date of preparation.
ASSETS-LIABILITIES =NET WORTH.
it provides a snapshot of the business on the day or preparation.
what adjustments are made to final accounts?
final accounts are prepared on an accruals basis meaning income and expenses are recorded in the period they derive not the period in which they are paid as such unpaid bills must be recorded.
1) outstanding expenses
- added as an expense on the profit and loss account
- added as an accrual under current liabilities on the balance sheet.
2) prepayments
- payments made in advance must be added to the final accounts.
- profit and loss - reduces the value of the prepaid item in expenses
balance - added as a preyayment under current assets.
work in progress
bills yet to be issued for work completed for a client
profit and loss: added as profit costs under income.
balance sheet: added as a current asset.
closing stock
leftover stock unsolved in the previous period
profit and loss: added as a loss under income.
balance sheet: added as a current asset under stock
how are business accounts analysed?
what are the general considerations which need to be kept in mind when analysis business accounts?
general: the main purpose of accounts is to ascertain profitability and means of debt repayment.
1) profitability - a business may be profitable but have no cash or means to repay debts e.g. its profits are all owed as book debts.
2) debt repayment - the company may be worth a lot but if this is all tied up in fixed assets, its liquidity may mean it cannot pay its debts.
what are partnership accounts?
partnerships must reflect additional information due to its multiple ownership.
1) partner records?: each partner will have a record showing their capital contributions, profit owed to them and sums withdrawn from the year.
2) partner capital accounts: each partner will have a partner capital account showing the capital they have contributed
profit share: partners share profits and losses equally by default or in accordance with a bespoke partnership agreement. they may also receive a salary and interest on their capital contributions.
1) salary: simply means first rights to a certain amount of profit prior to the remaining profits being distributed.
2) interest - means of awarding greater profits to those who have contributed more capital.
3) taxation - partners submit personal tax returns and claim personal allowances.
