Business (Debt Finance and Accounts) Flashcards
What are financial statements?
Financial statements are prepared in respect of each accounting period and typically include
(a) a profit and loss account and
(b) a balance sheet.
What is book-keeping?
Book-keeping is the process businesses use to record money transactions, logging daily transactions and grouping similar transactions together in a nominal ledger.
What is double entry book-keeping?
Double entry book-keeping means every money transaction has a dual accounting effect, recorded as a debit entry (out) and a credit entry (in).
What is the trial balance?
The trial balance is a listing of all business ledger balances showing debt and credit, and is used to prepare the financial statements.
What are assets?
Assets are things owned by the business. Fixed assets are long-term assets, while current assets are items that can be turned into cash within a year.
What are liabilities?
Liabilities are amounts owed by the business. Current liabilities are due within a year, and long-term liabilities are due after one year.
What is capital in business accounting?
Capital is the value injected into the business by the owner or investor, separate from business-generated income.
What are income and expense accounts?
Income accounts record sums received by the business, and expense accounts record day-to-day spending.
What are year-end adjustments?
Year-end adjustments modify trial balance entries to ensure income and expenses match the relevant accounting period.
What is the profit and loss account?
The profit and loss account shows income minus expenses to determine net profit or loss for the accounting period.
What is a balance sheet?
The balance sheet records the business’s assets, liabilities, and capital at a specific point in time, showing the financial position of the business.
What is the date on a balance sheet?
The date on the balance sheet is the last day of the accounting period and represents a snapshot of the business’s financial position at that time.
What is the Net Asset Value (NAV)
The value of assets the business has — the liabilities owed.
Recorded in the top half of balance sheet
Where is capital invested in the business shown on the balance sheet?
Recorded in the bottom half.
What are year-end adjustments for accruals?
Modifications to the account entries on the trial balance in order to apply matching concept to the preparation of financial statements.
This means…
- All income and expenditure matched to the relevant accounting period; and
- All current obligations anticipated as liabilities;
- All asset values assessed to make sure they can be recovered through future profits
What is a Depreciation Adjustment?
A fixed asset may have a useful life of serval years after which it may depreciate in value.
Depreciation accounts for the decline in value and spreads the cost of the asset over its useful life.
There are two methods of calcualtion - Straight Line and Reducing Balance
The balance sheet includes…
* The original cost
* Accumulated depreciation
* Net Book Value which is (Cost - Accumulated Depreciation )
How does the Straight Line Method work for Depreciation Adjustment?
It spreads depreciation evenly over the life of the asset and gives rise to the same charge for depreciation each year.
The charge each year is…
(a) included in depreciation account and constitutes a cost to the business; and
(b) accumulated yearly, reducing the net book value of the asset in the balance sheet)
For example, shelves are bought for a warehouse at £6,000 expected to last 5 years. Spread evenly (£6,000/5 ) £1,200 depreciation charge. Year 3 will show £3,600 as the value of the asset.
How does the Reducing Balance Method work for Depreciation Adjustment?
The depreciation charge each year is expressed as a percentage of the reducing balance.
More depreciation is charged in earlier years than in later years, since the value reduces each year
Used when the asset produces much more revenue in its earlier years of use and tends lose a larger part of value later in life (e.g. a van)
For example:
Plumbers buy a van for £12,000. The van depreciates at a rate of 20% each year.
Year 1 depreciation charge: £2,400 (20% of £12,000) > shown as an expense
Year 2 > £2,400 deducted from cost of the asset i (£12,000 - £2,4000) £9,600. The depreciation charge is 20% of the reduced balance (20% of £9600) = a charge of £1,920
What is a prepayment adjustment?
An expense is paid in the current year but all or part of the cost should be charged as an expense for next year
For example, rent paid for 3 months into next accounting period.
What is a bad debt adjustment?
A bad debt adjustment occurs when a business writes off a debt that is unlikely to be paid, removing it from receivables and recognizing it as an expense.
