Chapter 5 Flashcards

1
Q

What is the trial balance?

A

It is a summary of the balances on all the ledger accounts making up the general ledger

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

When is a trial balance prepared?

A

Before the final financial statements are produced

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the trial balance used for?

A

The trial balance is used to detect errors. Total debits should equal total credits.

If they don’t, an error, or errors have been made. The trial balance is also used to extract the financial statements, via the “extended trial balance”.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Profits in the trial balance

A

Note there is no account for “profit” but that total debits = total credits. To prepare the financial statements you must be able to classify each balance as an asset, liability, income, capital or expense

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the main categories of booking errors

A

Ones that result in the trial balance being out of balance
Ones that DONT result in the trial balance being out of balance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is compensating error

A

When two separate errors of equal value cancel each other out

TB still balances

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is casting error

A

Adding up error - too much or two little

TB does not balance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a trial balance structured lik?

A

List of Accounts | Debit | Credit
only one line of debit or credit filled in?
total at bottom of each column
Debit SHOULD = Credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What adjustments have to be made once the trial balance has been drawn up

A

1) depreciation
2) accruals and prepayments
3) Irrecoverable (‘bad’) debts
4) Recording closing inventory
5) Correcting errors

All have to be recorded in the nominal ledger, via the journal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What does the statement of profit or loss show?

A

The statement of profit or loss tells the results of the accounting period
i.e. it shows financial performance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the structure of the statement of profit or loss

A

Revenue
Gross Profit
Profit before tax
Profit for the year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the section of the statement of profit or loss before gross profit called?

A

Trading Account

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

At the end of the period when books are closed, what happens with the statement of profit or loss?

A

All income and expense accounts are cleared to the statement of profit or loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are other words for statement of profit or loss?

A

income statement
profit or loss account
income and expenditure account
profit or loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How is the statement of profit or loss treated in terms of the ledger account

A

The statement of profit or loss is a seperate ledger account in the nominal ledger and normal double entry rules apply

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

How is the statement of profit or loss represented in terms of D and C

A

Dr Sales (to clear the sales accounts to zero)
Cr statement of profit or loss

17
Q

Is anything carried forward on the statement of profit or loss

A

we do not ‘carry forward’ balances on the statement of profit or loss
ALL income and expense accounts start the next period with nil balances

We want to show income and expesnse for a period - wrong to have last year’s sales or wages sitting in the ledger accounts for this year

18
Q

What is the final step of profit and loss statement?

A

Clear the balance on the statement of profit or loss, which will be the profit or loss for the year. This is added to the owners capital.
Drawings are deducted from the owners capital

18
Q

What are drawings?

A

drawings” refer to the amounts of money or other assets that the owner of a business withdraws from the business for personal use.
These withdrawals reduce the owner’s equity or capital in the business.

Drawings are not considered expenses of the business and do not appear on the statement of profit or loss.
Instead, they are deducted from the owner’s capital account in the equity section of the balance sheet.

18
Q

What is the Statement of Financial position sometimes called?

A

The balance sheet

19
Q

What is the statement of financial position

A

a snapshot of the business assets and liabilities at a particular date

20
Q

What are the two main sections of the Statement of FInancial position

A

Debits and Credits

21
Q

In the statement of financial position, what is in the debits section#/

A

Assets
MORE HERE
Total Assets

22
Q

In the statement of financial position, what is in the credits section?

A

Capital and Liabilities
MORE HERE - vid?
Total Capital and liabities

23
Q

What are the 6 accounting equations

A

Debits = Credits

Assets = Liabilities + Capital + Profits - Drawings

Assets - Liabilities (net assets) = Capital + Profits - Drawings

Net assets = Capital

Change in Net assets = Change in capital + Profit - Drawings

Profit = Increase in Net assets - Increase in Capital + Drawings

24
Q

What is the theory behind the accounting equation

A

always two equal and opposite entries for every transaction, the accounts should balance, that is the total of debit entries should be equal to the total of the credit entries
this equation can therefore be rearranged in many different forms