Day 1 - chapter 1 Flashcards
What is accounting?
the recording and summarising of transactions
What is the accounting process?
- Transaction occurs
Eg. Owner invests £ in business - Record the transaction
- Record all transaction over an accounting period (AP)
- Balance off all of the accounts at the end of the AP
- Extract a TB = summary of balances in all accounts
- Adjust the TB
- Prepare our FS
What are the three financial statements?
- statement of profit and loss
- statement of financial position
- statement of cash flow
What does the statement of profit or loss show?
profit for a period
performance = profit
What does the statement of financial position show?
wealth of a business at a point in time
position = net assets
What is the equation for statement of profit and loss?
income (money earned by a business) – expenses (costs incurred by business)
What is income?
- Sales revenue
- Bank interest income
- Rental income
What are examples of expenses?
- Wages/salaries
- Rent expense
- Gas/electricity
- Marketing
- Insurance etc
- Repairs and maintaince
What is the equation for statement of financial position?
Assets = liabilities + equity/capital
What is an asset?
- Resources that business owns
- Eg. Land, buildings, equipment, inventory
What is a liability?
- Obligations
- Money owed to other parties
- Eg. Loans, bank overdrafts, trade payables
What is capital?
money owed to owners
What are the 5 elements of the FS?
- Income
- Expenses
- Assets
- Liabilities
- Capital
What is a company?
A business owned by any number of shareholders and operated by directors – who may or may not be shareholders
Why are the 5 elements of accounting important?
We need to know which element the transaction falls into to do accounting
Shareholders
Owners and not personally liable for the debts for the company
A Company
separate legal entity = liable for its own debt
Company must prepare in accordance with the accounting standards and legislation e. UK: Companies Act 2006
Must also be filed with companies house every year – strict deadline
What is PPE?
- Land and buildings
- Plant and machinery
- Compute equipment
- Office equipment
- Motor vehicles
- Furniture
- Fixtures and fittings
Receivable
- Money owed to the business
- Credit customers
Payable
We owe them money
What is the accounting equation?
Assets = liabilities + equity (capital)
What is gross profit?
revenue - cost of goods sold
What is operating profit?
gross profit + other operating income - distribution costs - admin costs = operating profit
What is a example of other operating income?
rental income
What are examples of distribution costs?
selling costs
eg. Cost of delivering goods to customers = carriage outwards
eg. Salespersons salary
What is examples of administrative costs?
Everything eg. Salaries, admin, stationary, staff salaries
What is profit before tax?
operating proft + finance income/investment income/bank interest income - finance costs
What is the net profit/loss for the period?
profit before tax - tax
What is Capital Expenditure?
- Acquire long term asset ei. NCA
- To improve or enhance the earning capacity of long term assets
What is Revenue Expenditure?
- For the day to day running costs of business – expense on P/L
- For trade purposes of raw materials or items for resales, expenditure on wages and salaries selling and distribution expenses, administrate expense and finance costs or
- To maintain the existing earning capacity of long-term asset
- Eg. Salries, rental expenses, wages salaries
Time period for capital expenditure?
more than a year
Time period for revenue expenditure?
less than a year
What are the two produced codes of ethics that state the fundamental ethical principles that all professional accountants should adhere to?
ICAEW
Ethics Standards Board of Accountants (IESBA)
What is the ICAEW Code of Ethics based on?
International Ethics Standards Board of Accountants (IESBA) Code of Ethics for Professional Accountants
What does the IESBA develop?
ethical standards to be applied across accounting profession
ensures the global accountancy profession is valued in the development of strong and sustainable organisations
What is the SHORT HAND for principles of ethics?
PIPCO
P
professional behaviour
- compliance with relevent laws and regulations
- avoid action that discredits the profession
I
integrity
- honest and straightforward
P
professional competence and due care
- need relevant skills to do the job
C
confidentiality
- cannot disclose info without permission
- legal requirements trumps ethical requirements
O
objectivity
- not to be biased
