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SQE 1 > Chapter 5 - Financing a business - Business Accounts > Flashcards

Chapter 5 - Financing a business - Business Accounts Flashcards

1
Q

For SQE what is important to know when it comes to business accounts?

A

How business accounts are constructed,
the information they may give us about a business,
and the relevant report requirements

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2
Q

What are business accounts?

A

Business accounts are summaries of financial information

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3
Q

What is the double entry system of accounts?

A

Every business transaction has a debit and a credit.

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4
Q

How does a business transaction begin?

A

With a trial balance, which means obtaining all the credit and debit balances from the various account ledgers

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5
Q

How many parts does the balance sheet include?

A

Two

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6
Q

What is the first part of the balance sheet show?

A

Shows the value of business at a particular point in time.

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7
Q

What is the basic formula for the balance sheet?

A

Assets, less liabilities

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8
Q

How do net current assets form?

A

total assets, lesstotal liabilities

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9
Q

What is the second part of the balance sheet show?

A

What is owned to the owner (where the money the business came from) at a particular point in time.

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10
Q

What is the basic formula for the second part of the balance sheet?

A

Capital, plus net profit (from the profit and loss account), less drawings

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11
Q

Where is the net profit coming from?

A

From the profit and loss account.

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12
Q

What are the assets result of?

A

They are a result of expenditure

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13
Q

What happens to the benefits of the assets?

A

Their benefit is usually spread over a long period of time

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14
Q

What are the fixed assets?

A

Land, vehicles and machinery

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15
Q

What are the more fluid current assets?

A

Debtors and cash

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16
Q

What are liabilities?

A

Liabilities are sums owed by the business (loans, creditors).

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17
Q

Define current liabilities

A

Those liabilities payable within a year

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18
Q

What does capital mean?

A

The sum invested in the business by the owner

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19
Q

Define long-term liability

A

Those liabilities that take more than a year to be paid

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20
Q

What do drawings mean?

A

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

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21
Q

What is a loan, a liability, or an expense?

A

A loan is a liability

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22
Q

What is the interest paid to a loan, a liability, or an expense?

A

An interest paid towards a loan is an expense.

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23
Q

What are business accounts based on? and what does that mean?

A

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).

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24
Q

What needs to happen to a business account after the trial balance has been prepared?

A

It may be necessary to make adjustments to the accounts.

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25
Q

Where are the amendments need to be made on the business account?

A

On the profit and loss account, and balance sheet.

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26
Q

What should I know about the SQE for the business account entries?

A

You should be aware of the main adjustments and how they may impact the final accounts

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27
Q

What are the main adjustments for a business account?

A

Prepayments
Accruals
Closing stock/Work in progress
Opening stock/Work in progress
Depreciation
Bad debts
Doubtful debts

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28
Q

What are the prepayments?

A

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.

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29
Q

How are the deduction of pre-payments classified, expenses or liabilities?

A

They are deducted as an expense in the profit or loss account and included as a current asset in the balance sheet.

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30
Q

How are the pre-payments registered in the balance sheet (profit and loss account)?

A

They are included as a current asset in the balance sheet.

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31
Q

What are accrual payments?

A

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)

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32
Q

What is an accrual opposite in terms of payments

A

The opposite of a prepayment

33
Q

What is an accrual payment, an expense or a liability?

A

These are included as an expense in the profit and loss account.

34
Q

How is an accrual expense recorded on the balance sheet in the business account in the profit and losses account?

A

They are recorded as a current liability on the balance sheet.

35
Q

What does closing stock mean and relate to?

A

This relates to stock for trading business.

36
Q

What does it mean closing stock/work in progress?

A

This relates to trading business and work in progress for service business that has not been billed in the current financial year.

37
Q

How is recorded a closing stock/work in progress on the profit and loss account?

A

It is included as income

38
Q

How is recorded a closing stock/work in progress on the balance sheet?

A

A current asset.

39
Q

What does it relate to opening stock/work in progress?

A

It relates to closing stock/work in progress from the previous financial year.

40
Q

How is deducted the opening stock/work in progress in the profit and loss account?

A

Deducted from income

41
Q

What entry does the opening stock/work in progress has on the balance sheet?

A

IT has no entry

42
Q

What happens with the value of the assets over time?

A

They need to be recalculated.

43
Q

What happens to the assets that decrease in value?

A

They need to be revalued.

44
Q

What does it usually happen to assets over time?

A

They depreciate over time

45
Q

What is depreciate?

A

Depreciate is a hidden expense and has an impact on the value of the business.

46
Q

How is a depreciation included on the profit and loss account?

A

As an expense

47
Q

How is the depreciation recorded on the balance sheet?

A

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).

48
Q

What is a bad debt?

A

A debt that a business will never paid so it is written off.

49
Q

How is a bad debt recorded on the profit and loss account?

A

As an expense

50
Q

How is a bad debt recorded on the balance sheet?

A

It will be deducted from the debtor figure

51
Q

What is a doubtful debt?

A

A debt that the business decides is unlikely to be paid.

52
Q

How is a doubtful debt recorded on the profit and loss account?

A

It is included as an expense

53
Q

How is a doubtful debt recorded on the balance sheet?

A

It is deducted from the debtor’s figure as a separate entry.

54
Q

How does the balance sheet,and the profit and loss account work for partnerships?

A

The profit and loss account and the top part of the balance sheet is the same as for a sole trader.

55
Q

In a partnership what else is added to the profit and loss account?

A

It’s added at the bottom of it an appropriation account.

56
Q

What else is added to the balance sheet of the partnership?

A

On the second part of the balance sheet is adjusted to reflect the other owner of the business.

57
Q

What is an appropiation account?

A

It’s an extension of the profit and loss account.

58
Q

What does the appropiation account show?

A

IT shows the division of profits between the partners.

59
Q

What is the profit divided into?

A

Profit is divided in salaries, which are paid first then interest on capital

60
Q

What is left of the profit when salaries are paid and the interest on capital?

A

It’s left the residual profit

61
Q

What happens with the residual profit?

A

Is shared according to the agreed profit-sharing ratio.

62
Q

What does the balance sheet of a partnership comprise of?

A

The capital account and the partner account for each partner

63
Q

What is the capital account?

A

The amount of capital invested in the business by the partner

64
Q

Where is the capital account kept?

A

Is kept separate from the current account.

65
Q

What are the needs for a company account?

A

A need for a share capital account and a share premium account

66
Q

What does the share capital account show?

A

Shows the funds contributed by shareholders in exchange of shares of their nominal value

67
Q

What does the share premium account show?

A

Shows the funds contributed by shareholders in exchange for shares over their nominal per value. (where a minimum has been paid)

68
Q

Where are directors’ salaries shown in the business account and why?

A

Will show as an expense of the business because of the company’s separate legal personality.

69
Q

How is profit appropiated?

A

Corporation tax (profits are shown before and after tax)
Dividends
Retained profit

70
Q

What does inculde the second part of the balance sheet?

A

Capital (capital reverses)
Reserves ( for revenue reserves)

71
Q

What is capital and reserves show?

A

Shows what is owed to the shareholders

72
Q

When is Capital reserves not distributable and why?

A

Capital resrves are not distributable when a company is solvent because of the principle of capital maintenance.

73
Q

When are revenue reserves distributable and which is the most important one?

A

Yes, they are distributable, and the most important is the profit and loss reserve.

74
Q

What is a revenue reserve show?

A

Show profit after tax and dividents

75
Q

What do directors need to do each year regarding the business account?

A

Directors must file annual accounts each year

76
Q

What do group companies must do each year?

A

They must produce consolidated accounts showing the financial position of the whole group.

77
Q

With what practice guide do the company accounts must comply with?

A

With FRS102

78
Q

What is FRS102?

A

Is a best practice guide produced by the accounting profession and the International Financial Reporting Standards of the International Accounting Standards Board.

79
Q

Why do they have to standardize the accounts?

A

So they are easier to interpret.

SQE 1 (12 decks)

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