Chapter 1 - Intro To Accounting

Question 1

What 2 elements does Accounting consist of?

Answer 1

• Recording transactions to provide up to date info for management
• Summarising transactions for a period to provide info on the company

Question 2

What are the 5 financial statements?

Answer 2

1. Statement of profit or loss (SPL)
2. Statement of financial position (SFP)
3. Statement of cashflows
4. Statement of changes in equity
5. Notes to the financial statements

Question 3

Who owns a sole trader business?

Answer 3

A sole trader business is owned and managed by one person.

Question 4

In a sole trader business, who is liable for any losses the business makes?

Answer 4

Legally, the business and the owner are the same. The owner is FULLY LIABLE for any losses the business makes.

Question 5

What kind of tax does a sole trader business pay?

Answer 5

The business doesn’t pay any tax beyond VAT. The owner pays income tax.

Question 6

Who owns a partnership business?

Answer 6

A business owned jointly by a number of partners.

Question 7

In a partnership business, who is liable for any losses the business makes?

Answer 7

Legally, the business and the partners are the same. The partners are FULLY LIABLE for any losses the business makes.

Question 8

What kind of tax does a partnership business pay?

Answer 8

The business doesn’t pay any tax beyond VAT. The partners pay income tax.

Question 9

What is an LLP?

Answer 9

A Limited Liability Partnership

Question 10

What is the difference between a general partnership and an LLP?

Answer 10

For an LLP, each partner is liable for any losses UP TO a certain amount.

Question 11

Who owns a company?

Answer 11

A company is owned by any number of shareholders.

Question 12

Who runs a company?

Answer 12

Shareholders elect the DIRECTORS to run the business

Question 13

In a company, who is liable for any losses the business makes?

Answer 13

Legally the business and the shareholders are separate. The shareholders WILL NOT be personally liable for any losses the company incurs.

Question 14

What liability do shareholders have?

Answer 14

Their liability is limited to the NOMINAL VALUE of the shares they own.

Question 15

What kind of tax does a company pay?

Answer 15

The business pays corporation tax (and VAT) which is included in the financial statements. The shareholders pay income tax on the dividends.

Question 16

What is a statement of financial position?

Answer 16

A list of assets and liabilities of the business.

Question 17

What period of time does an SFP cover?

Answer 17

An SFP shows values at a particular point in time (usually last day of the accounting period).

Question 18

What is an asset?

Answer 18

Items that the business OWNS or controls.

Question 19

What is a liability?

Answer 19

Items that the business OWES.

Question 20

What is the purpose of the SFP?

Answer 20

To show the total assets and the total liabilities.

Note: A = L + E

Question 21

What is a statement of profit or loss?

Answer 21

A statement that shows the revenue and the expenses of a business for the accounting period.

Question 22

What is the purpose of the SPL?

Answer 22

To show the profit or loss that the business made during the last accounting period.

Question 23

What is capital expenditure?

Answer 23

Expenditure incurred to acquire long term assets or enhance existing long term assets.

Question 24

How do you record capital expenditure?

Answer 24

As a non-current asset in the SFP.

Question 25

What is revenue expenditure?

Answer 25

Expenditure incurred for trade purposes or to maintain (the earning capacity of) existing long term assets.

Question 26

How do you record revenue expenditure?

Answer 26

As an expense in the SPL.