Chapter 5 - Financing a business - Business Accounts Flashcards
For SQE what is important to know when it comes to business accounts?
How business accounts are constructed,
the information they may give us about a business,
and the relevant report requirements
What are business accounts?
Business accounts are summaries of financial information
What is the double entry system of accounts?
Every business transaction has a debit and a credit.
How does a business transaction begin?
With a trial balance, which means obtaining all the credit and debit balances from the various account ledgers
How many parts does the balance sheet include?
Two
What is the first part of the balance sheet show?
Shows the value of business at a particular point in time.
What is the basic formula for the balance sheet?
Assets, less liabilities
How do net current assets form?
total assets, lesstotal liabilities
What is the second part of the balance sheet show?
What is owned to the owner (where the money the business came from) at a particular point in time.
What is the basic formula for the second part of the balance sheet?
Capital, plus net profit (from the profit and loss account), less drawings
Where is the net profit coming from?
From the profit and loss account.
What are the assets result of?
They are a result of expenditure
What happens to the benefits of the assets?
Their benefit is usually spread over a long period of time
What are the fixed assets?
Land, vehicles and machinery
What are the more fluid current assets?
Debtors and cash
What are liabilities?
Liabilities are sums owed by the business (loans, creditors).
Define current liabilities
Those liabilities payable within a year
What does capital mean?
The sum invested in the business by the owner
Define long-term liability
Those liabilities that take more than a year to be paid
What do drawings mean?
Money withdrawn by the owner of an unincorporated business, on account of profits owed to them. Basically how much money did the owner take from the profits
What is a loan, a liability, or an expense?
A loan is a liability
What is the interest paid to a loan, a liability, or an expense?
An interest paid towards a loan is an expense.
What are business accounts based on? and what does that mean?
They are based on the accruals method of accounting. This means that items within the accounts should properly relate to the relevant period (the financial year).
What needs to happen to a business account after the trial balance has been prepared?
It may be necessary to make adjustments to the accounts.
Where are the amendments need to be made on the business account?
On the profit and loss account, and balance sheet.
What should I know about the SQE for the business account entries?
You should be aware of the main adjustments and how they may impact the final accounts
What are the main adjustments for a business account?
Prepayments
Accruals
Closing stock/Work in progress
Opening stock/Work in progress
Depreciation
Bad debts
Doubtful debts
What are the prepayments?
These are payments the business made in advance on account of a service, or something that will not be used until the next financial year.
How are the deduction of pre-payments classified, expenses or liabilities?
They are deducted as an expense in the profit or loss account and included as a current asset in the balance sheet.
How are the pre-payments registered in the balance sheet (profit and loss account)?
They are included as a current asset in the balance sheet.
What are accrual payments?
These will be payments the business will make in arrear, for services used in the financial year, but not yet paid for. (the opposite of pre-payment)
What is an accrual opposite in terms of payments
The opposite of a prepayment
What is an accrual payment, an expense or a liability?
These are included as an expense in the profit and loss account.
How is an accrual expense recorded on the balance sheet in the business account in the profit and losses account?
They are recorded as a current liability on the balance sheet.
What does closing stock mean and relate to?
This relates to stock for trading business.
What does it mean closing stock/work in progress?
This relates to trading business and work in progress for service business that has not been billed in the current financial year.
How is recorded a closing stock/work in progress on the profit and loss account?
It is included as income
How is recorded a closing stock/work in progress on the balance sheet?
A current asset.
What does it relate to opening stock/work in progress?
It relates to closing stock/work in progress from the previous financial year.
How is deducted the opening stock/work in progress in the profit and loss account?
Deducted from income
What entry does the opening stock/work in progress has on the balance sheet?
IT has no entry
What happens with the value of the assets over time?
They need to be recalculated.
What happens to the assets that decrease in value?
They need to be revalued.
What does it usually happen to assets over time?
They depreciate over time
What is depreciate?
Depreciate is a hidden expense and has an impact on the value of the business.
How is a depreciation included on the profit and loss account?
As an expense
How is the depreciation recorded on the balance sheet?
The accumulated depreciation to date is deducted from the value of the asset to give it’s net book value (which means the current value at the current time).
What is a bad debt?
A debt that a business will never paid so it is written off.
How is a bad debt recorded on the profit and loss account?
As an expense
How is a bad debt recorded on the balance sheet?
It will be deducted from the debtor figure
What is a doubtful debt?
A debt that the business decides is unlikely to be paid.
How is a doubtful debt recorded on the profit and loss account?
It is included as an expense
How is a doubtful debt recorded on the balance sheet?
It is deducted from the debtor’s figure as a separate entry.
How does the balance sheet,and the profit and loss account work for partnerships?
The profit and loss account and the top part of the balance sheet is the same as for a sole trader.
In a partnership what else is added to the profit and loss account?
It’s added at the bottom of it an appropriation account.
What else is added to the balance sheet of the partnership?
On the second part of the balance sheet is adjusted to reflect the other owner of the business.
What is an appropiation account?
It’s an extension of the profit and loss account.
What does the appropiation account show?
IT shows the division of profits between the partners.
What is the profit divided into?
Profit is divided in salaries, which are paid first then interest on capital
What is left of the profit when salaries are paid and the interest on capital?
It’s left the residual profit
What happens with the residual profit?
Is shared according to the agreed profit-sharing ratio.
What does the balance sheet of a partnership comprise of?
The capital account and the partner account for each partner
What is the capital account?
The amount of capital invested in the business by the partner
Where is the capital account kept?
Is kept separate from the current account.
What are the needs for a company account?
A need for a share capital account and a share premium account
What does the share capital account show?
Shows the funds contributed by shareholders in exchange of shares of their nominal value
What does the share premium account show?
Shows the funds contributed by shareholders in exchange for shares over their nominal per value. (where a minimum has been paid)
Where are directors’ salaries shown in the business account and why?
Will show as an expense of the business because of the company’s separate legal personality.
How is profit appropiated?
Corporation tax (profits are shown before and after tax)
Dividends
Retained profit
What does inculde the second part of the balance sheet?
Capital (capital reverses)
Reserves ( for revenue reserves)
What is capital and reserves show?
Shows what is owed to the shareholders
When is Capital reserves not distributable and why?
Capital resrves are not distributable when a company is solvent because of the principle of capital maintenance.
When are revenue reserves distributable and which is the most important one?
Yes, they are distributable, and the most important is the profit and loss reserve.
What is a revenue reserve show?
Show profit after tax and dividents
What do directors need to do each year regarding the business account?
Directors must file annual accounts each year
What do group companies must do each year?
They must produce consolidated accounts showing the financial position of the whole group.
With what practice guide do the company accounts must comply with?
With FRS102
What is FRS102?
Is a best practice guide produced by the accounting profession and the International Financial Reporting Standards of the International Accounting Standards Board.
Why do they have to standardize the accounts?
So they are easier to interpret.
