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Accounting > Chapter 1 - Intro > Flashcards

Chapter 1 - Intro Flashcards

1
Q

What are financial statements?

A
  • financial records of an organisation
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2
Q

What do financial statements primarily comprise of?

A
  • P&L
  • balance sheet
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3
Q

What does accounting represent?

A
  • the techniques involved in recording the transactions of the business on a regular basis
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4
Q

What does bookkeeping refer to?

A
  • process of recording financial transactions
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5
Q

The actual system of accounting chosen by the business should be able to determine?

A
  • whether the business is operating a profit
  • can the business meet its liabilities as they fall due
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6
Q

What 3 questions must the accounting system be able to answer?

A
  1. How well is the business doing (is it profitable?)
  2. What does the business own (assets)
  3. How much does the business owe (liabilities)
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7
Q

Why might the owners of the business use financial statements?

A
  • to see how their investment is performing
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8
Q

Why might management within a business use financial statements?

A
  • to see if they are running the business profitably and efficiently
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9
Q

Why might employees be interested in financial statements?

A
  • to know if their jobs are secure
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10
Q

Why might creditors be interested in a business’ financial statements?

A
  • to see if the business can pay the amounts owed and on time
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11
Q

Why would HMRC be interested in a business’ financial statements?

A
  • informs them how much tax should be paid on the business transactions
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12
Q

Why would banks other lenders be interested in a business’ financial statements?

A
  • to assess whether it is safe to lend to the business
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13
Q

Tax legislation dictates the adjustments that are made to the accounting figures produced from the records , what are these adjustments known as?

A
  • adjustments to profit
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14
Q

What is the starting point for adjustments to profit?

A
  • net profit/loss as calculated from the financial statements
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15
Q

What do accounting standards require regarding the preparation of accounts?

A
  • prepared on an accrual basis
  • same basis used for tax purposes
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16
Q

What is cash basis?

A
  • income is accounted for when it is actually received and allowable expenses are deduced when the cash is paid
17
Q

What businesses are eligible to use cash basis?

A
  • 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
18
Q

Describe a sole trader

A
  • 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
19
Q

Describe a partnership

A
  • 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
20
Q

Describe a company

A
  • 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
21
Q

Describe a LLP

A
  • 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
22
Q

For accounting purposes the individual business is always regarded as an entity in its own right, why?

A
  • 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
23
Q

What is the balance sheet?

A
  • summarises assets, liabilities and capital of a business at a particular date
24
Q

What is an asset

A
  • 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
25
Q

What is a liability?

A
  • amount that owed by the business to people outside the business
  • e.g overdrafts, loans, trade creditors
26
Q

What is capital?

A
  • the sum that is owed by the business to the owner/proprietor
27
Q

What are fixed assets?

A
  • assets that are used within the business on a long term basis and are used to help the business trade
  • land, buildings, plant, machinery,
28
Q

What are current assets?

A
  • 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
29
Q

What are creditors?

A
  • 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
30
Q

How do we calculate net current assets?

A
  • CA-Creditors due within one year
31
Q

How do we calculate overall total of net assets?

A

FA - net current assets ( CA-ST creditors) - LT creditors

32
Q

Describe the bottom half of the balance sheet

A
  • 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)
33
Q

What does the total of proprietors funds show?

A
  • 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
34
Q

What is the P&L account?

A
  • summarises all the income and expenditure which has arisen during a trading period
35
Q

What is gross profit?

A

Sales - cost of sales

  • direct profit made from trading activities
36
Q

What is net profit/loss?

A

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

Accounting (16 decks)

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