Chapter 10: Accounting Flashcards
Why are companies required to record all their financial transactions?
- Monitor Financial Situation: To track their financial status in real-time.
- Stakeholder Protection: To provide necessary information to stakeholders (e.g., suppliers, creditors, owners, government agencies) for evaluating financial reliability, investment returns, and tax compliance.
Describe some of the bookkeeping requirements according to the legislation (i.e the swedish bookkeeping act).
- Record All Financial Transactions: Every transaction must be documented.
- Maintain Vouchers: Supporting documentation is required for every bookkeeping entry.
- Historical Records: Ensure the system maintains a chronological record of all entries.
- Preserve Accounting Information: Keep all data and the tools needed to present it in the required format.
- Prepare a Balance Sheet: Complete a balance sheet following the required procedures at the end of each accounting period.
What is a supporting voucher?
A supporting voucher is proof of a financial transaction, like a received invoice, showing the company paid for a good or service.
What are the requirements of a supporting voucher according to the: Swedish Bookkeeping Act?
- Invoice Date
- Customer Details
- Delivery Date
- Description of Goods/Services
- Total Amount
What are the requirements of a supporting voucher according to the: VAT laws?
- Unique Serial Number
- Seller’s VAT Registration Number
- Seller’s and Purchaser’s Name and Address
- Quantity and Type of Goods/Services
- Price Before VAT
- Applicable VAT Rate(s)
- VAT Amount Due
What is the right side of a T-account called, and what is the left side called?
left: debit
right: credit
What is double-entry bookkeeping?
A system where every financial transaction is recorded in two accounts: the total debits must always equal the total credits.
Why should a company use double entry bookkeeping?
- Accurate Financial Records: Ensures financial transactions are recorded properly.
- Financial Statements: Produces accurate balance sheets (showing assets and liabilities at year-end) and income statements (showing revenues, costs, and profit for the year).
- Profit/Loss Analysis: Clearly shows profit or loss as the difference between changes in assets and liabilities.
- Reliability: Provides a true and consistent financial result across statements.
Provide 3 examples of: assets
- Intangible Assets (e.g., patents)
- Land and Buildings
- Machinery and Equipment
- Financial Assets (e.g., leases and investments)
- Inventories
- Accounts Receivable from Customers
- Cash in Bank
- Cash on Hand
Provide 3 examples of: liabilities
- Accounts Payable to Suppliers
- Bank Loans
- Taxes Payable
- Bank Overdrafts
Provide 3 examples of: income
- Sales
- Interest
- Royalties
Provide 3 examples of: expenditures
- Materials
- Salaries
- Rents
- Repairs
- Work Supplies (e.g., work clothes)
- Office Supplies
- Travel Expenses
How do you make a correction of an erroneously recorded financial transaction in the bookkeeping system?
- Reverse the Incorrect Entry: Change the debit to a credit (or vice versa) to cancel the mistake.
- Record the Correct Entry: Post the transaction correctly.
This method ensures a clear trail of the correction, showing who made it and why.
Describe the main characteristics of the BAS chart of Accounts:
BILD
What is input VAT?
- VAT paid by a company for purchased goods or services.
- Recorded as a negative liability (debit side of a liability account).
- Considered an asset, as it can be refunded or deducted on the company’s tax return.
- Cannot be deducted for non-deductible expenses (e.g., certain business entertainment).
(Companies pay the difference between output VAT and input VAT to the tax authorities. If input VAT exceeds output VAT, the excess can be deducted on the company’s tax return. End consumers always bear the final VAT cost.)
What is VAT?
VAT (Value Added Tax) is a government tax on the value added to goods and services.
- Companies charge VAT on sales and can deduct VAT on their purchases.
- They pay VAT to the government only on the difference between output VAT (sales) and input VAT (purchases).
- VAT is applied at every step of the value creation process.
Why does many Swedish companies use it in their accounting system (BAS chart of accounts)?
- Standardization: Provides standard account names, numbers, and classifications.
- Wide Applicability: Usable by most businesses, associations, and government agencies in Sweden with minor adjustments.
- Software Support: Supported by most Swedish accounting software.
- Legal Compliance: Helps meet legal requirements for external financial accounting.
- Facilitates Management Accounting: Simplifies internal cost calculations and analyses (though not legally required).
Describe how financial transactions are systematically and chronologically accounted for according to the Bookkeeping act?
Chronological Recording: Transactions are recorded in sequence using a journal, organized by the time they occur.
Systematic Recording: Transactions are sorted by account using the general ledger.
At year-end, results are summarized in the balance sheet and income statement, recorded in the annual accounts book.
In simple systems, like a cashbook, each column serves as an account, satisfying both requirements.
What is output VAT?
- VAT collected by a company when selling goods or services.
- Recorded as a negative asset (credit side of an asset account).
- Represents a liability to the tax authorities.
(Companies pay the difference between output VAT and input VAT to the tax authorities. If input VAT exceeds output VAT, the excess can be deducted on the company’s tax return. End consumers always bear the final VAT cost.)
Describe how VAT is recorded for company that buys:
- Debit: Expenditure account (e.g., materials purchase) – for the cost of goods/services.
- Debit: VAT account (Input VAT) – for the VAT paid.
- Credit: Balance sheet account (e.g., accounts payable) – for the total amount owed.
Describe how VAT is recorded for company that sells:
- Credit: Income statement account (e.g., sale of goods) – for the revenue from the sale.
- Credit: VAT account (Output VAT) – for the VAT collected.
- Debit: Balance sheet account (e.g., accounts receivable) – for the total amount owed by the customer.
