Chapter 1 - Intro Flashcards
What are financial statements?
- financial records of an organisation
What do financial statements primarily comprise of?
- P&L
- balance sheet
What does accounting represent?
- the techniques involved in recording the transactions of the business on a regular basis
What does bookkeeping refer to?
- process of recording financial transactions
The actual system of accounting chosen by the business should be able to determine?
- whether the business is operating a profit
- can the business meet its liabilities as they fall due
What 3 questions must the accounting system be able to answer?
- How well is the business doing (is it profitable?)
- What does the business own (assets)
- How much does the business owe (liabilities)
Why might the owners of the business use financial statements?
- to see how their investment is performing
Why might management within a business use financial statements?
- to see if they are running the business profitably and efficiently
Why might employees be interested in financial statements?
- to know if their jobs are secure
Why might creditors be interested in a business’ financial statements?
- to see if the business can pay the amounts owed and on time
Why would HMRC be interested in a business’ financial statements?
- informs them how much tax should be paid on the business transactions
Why would banks other lenders be interested in a business’ financial statements?
- to assess whether it is safe to lend to the business
Tax legislation dictates the adjustments that are made to the accounting figures produced from the records , what are these adjustments known as?
- adjustments to profit
What is the starting point for adjustments to profit?
- net profit/loss as calculated from the financial statements
What do accounting standards require regarding the preparation of accounts?
- prepared on an accrual basis
- same basis used for tax purposes
What is cash basis?
- income is accounted for when it is actually received and allowable expenses are deduced when the cash is paid
What businesses are eligible to use cash basis?
- unincorporated business’
- I.e a sole trader or partnership with income < £150,000
- limited liability partnerships are ineligible to use the cash basis as are partnerships where one or more of the partners is a company
Describe a sole trader
- business and personal affairs of the sole trader are not distinguished in any way
- sole trader can be required to use personal assets to repay business debts
Describe a partnership
- two or more persons associated for the purpose of a business or profession
- business and personal affairs are not separate
- in Scotland, however, partnership is regarded as a legal seperate entity, I.e partners have limited liability
Describe a company
- distinct legal ‘person’ created in order to separate responsibility for the affairs of a business from the personal affairs of the individuals who own the business
- owners have limited liability - will not be required to contribute further towards the liabilities of the company
Describe a LLP
- Like a company liability of members to contribute to the LLP’s debts is limited to the LLP’s assets
- governed internally by an agreement between members which will perform the function of a partnership agreement
For accounting purposes the individual business is always regarded as an entity in its own right, why?
- necessary to know the business itself aside from the owners personal affairs
- easy to achieve in a company and LLP
- with a sole trader and partnership the business element must keep separate records distinct from private affairs
What is the balance sheet?
- summarises assets, liabilities and capital of a business at a particular date
What is an asset
- something that is owned by the business and use used by the business on an ongoing basis to help generate profit
- e.g premises, vehicles, stock, debtors, cash
What is a liability?
- amount that owed by the business to people outside the business
- e.g overdrafts, loans, trade creditors
What is capital?
- the sum that is owed by the business to the owner/proprietor
What are fixed assets?
- assets that are used within the business on a long term basis and are used to help the business trade
- land, buildings, plant, machinery,
What are current assets?
- increase or decrease daily and in theory can be easily converted into cash
- e.g stock, debtors, cash
- current assets are always shown in this order, starting with least liquid
What are creditors?
- someone who is owed an amount by the business
- amount is split between amounts due within one year and amounts due more than one year from balance sheet date
How do we calculate net current assets?
- CA-Creditors due within one year
How do we calculate overall total of net assets?
FA - net current assets ( CA-ST creditors) - LT creditors
Describe the bottom half of the balance sheet
- consists of the capital at the start of the trading period plus any profits / minus any losses which have been made during the accounting period less any amounts which have been withdrawn by the owner of the business (drawings)
What does the total of proprietors funds show?
- how the business was able to afford its net assets
- should always equal the top half of the balance sheet
- represent the amount which is owed by the business back to the owners
What is the P&L account?
- summarises all the income and expenditure which has arisen during a trading period
What is gross profit?
Sales - cost of sales
- direct profit made from trading activities
What is net profit/loss?
Gross profit - day to day running expenses of the business
- e.g heat, light, wages, insurance, asset depreciation etc.
- not all expenses are necessarily allowable for tax purposes
