chapter 12 Flashcards
understand the principle of double entry bookkeeping, understand the purpose of financial accounts; , understand how to interpret a profit and loss account and balance sheet, understand the accruals basis of preparing financial accounts, understand how partnership accounts are compiled and arranged, understand the differences between company accounts and those of an unincorporated business, understand domestic and international accounting standards and principles which dictate how a company's ac
what is double entry bookkeeping ?
recording of a businesses’ financial transactions is bookkeeping.
all businesses use the double entry bookkeeping system based on the principle that there are two aspects to every transaction.
this is recorded in the businesses’ books which have a left hand column and a right hand column. left hand is called the debit column and the right hand is called the credit column (CR)
if there are no errors in the books, the two figures should be the same
what is the term for the process of adding together all DR and CR entries?
trial balance
what is the purpose of final accounts?
the final accounts , comprising of the profit and loss account and balance sheet, show how well a business is performing financially and what it is worth
what is the profit and loss account ?
shows how profitable the business is in day-to-day business
what does the balance sheet show
what the business Is worth, taking into account all assets and liabilities
what calculation does the profit and loss account use ?
Income- Expenses = profit
if business’ expenses exceed income , it has made a loss, if the business has made a profit, the income will exceed expenses
how does a profit and loss account differ from a trial balance?
- workings in columns to the left and carry main figures across to the right hand column
- there are no DR or CR columns
- brackets are used to show that a figure is to be deducted or that it is a minus figure
- profit and loss account can be used to assess how profitable the business is.
what is the purpose of the balance sheet
shows the value of the business by listing its assets and liabilities on the last day of the accounting period.
what is the calculation that the balance sheet shows
assets-liabilities = net worth of the business
what are some things to look out for when interpreting assets on a balance sheet ?
assets are split into fixed assets and current assets
fixed assets- used in the business to enable it to run effectively
current assets- short term assets eg stock, debts and cash
assets appear on balance ce sheet In increasing order of liquidity (how easy it is to turn the business assets into cash). fixed assets at the top with current assets underneath
what are some things to look out for when interpreting liabilities on a balance sheet ?
divided into long-term and current liabilities
current liabilities - repayable in 12 months or less from date of balance sheet
long term liabilities - liabilities which are repayable more than 12 months from the date of the balance sheet (bank loan)
what is the purpose of net current assets?
shows the difference between current assets and current liabilities - shows the businesses liquidity
how are net assets calculate d
by subtracting short term and long term liabilities from fixed and current assets. this figure will always be equal to the amount owing to the business owner as capital at the end of the year
what is the capital employed section?
shows the value of the business to the owner
consists of the balance on the capital account and also the net profit from the profit and loss account.
what is the accruals basis of preparing financial accounts?
income and expenses are recorded in the period to which they relate instead of in the period when payment or receipt occurs. they must include all expenses relating to the accounting period, even if a bill has not yet been received.
