Debt Finance And Business Accounts Flashcards
What is double entry book-keeping?
A system where every money transaction has a dual effect in accounts, recorded as both a debit and a credit.
What is the formula for calculating profit?
Profit = Income - Expenses
What does a balance sheet represent?
A balance sheet shows the assets, liabilities, and equity of a business at a specific point in time.
What is included in the bottom half of a balance sheet?
Share capital and retained earnings.
What is a trial balance?
A list of all balances on a business’s ledgers/accounts at the end of an accounting period, showing debit and credit balances.
What is the effect of loans on the balance sheet?
Loans affect the top half of the balance sheet but do not affect equity.
What is a prepayment adjustment?
A prepayment reduces expenses, increasing profit, retained earnings, assets, and total equity.
What is an accrual adjustment?
An accrual increases expenses, reducing profit, retained earnings, and total equity.
What is the purpose of year-end adjustments?
To ensure that all income and expenditure shown on the financial statements relate only to the relevant accounting period.
What are fixed assets?
Assets owned by a business that provide long-lasting benefits, held for over a year.
What are current assets?
Assets that can quickly be turned into cash, typically within one year, such as stock and debtors.
What is a liability?
An amount owed by the business to someone else, categorized as current or long-term.
What is capital in a business context?
The owner’s investment in the business, including original contributions and retained profits.
What do income accounts record?
Sums received by the business from sales of goods or services.
What do expense accounts record?
Day-to-day spending of the business, excluding long-term asset purchases.
What is the profit and loss account?
A financial statement that records income minus expenses to determine profit or loss for a period.
What is the structure of a profit and loss account?
It includes income entries at the top, gross profit calculation, and expenses deducted to arrive at net profit.
What is the difference between a profit and loss account and a balance sheet?
A profit and loss account records income and expenses over a period, while a balance sheet provides a snapshot of assets, liabilities, and equity at a specific date.
What are the year-end financial statements prepared by a business?
The profit and loss account and the balance sheet.
Why is a profit and loss account considered incomplete?
It only records income and expenses accounts.
What does a balance sheet record?
The position of a business in respect of its asset, liability, and capital accounts.
How does the balance sheet differ from the profit and loss account?
The balance sheet is a snapshot relevant on a given date, while the profit and loss account relates to a period.
What does the date at the top of a balance sheet indicate?
The last day of the accounting period to which it relates.
What are the two key things a balance sheet tells the reader?
The net worth or net asset value (NAV) and the capital invested in the business.
What must always be true about the NAV and total capital figures on a balance sheet?
They must always be the same for the balance sheet to balance.
How are asset, liability, and capital entries transferred into the balance sheet?
Entries from the trial balance are transferred into the balance sheet.
What are the two categories of assets on a balance sheet?
Fixed/non-current assets and current assets.
What is the formula for calculating Net Book Value?
COST - ACCUMULATED DEPRECIATION = NET BOOK VALUE
What are year-end adjustments?
Transactions or modifications to the account entries on the trial balance.
What is depreciation?
A mechanism used to deal with the decline in value of a fixed asset over its useful life.
What are the two methods of depreciation?
The straight-line method and the reducing balance method.
What is the most common method of depreciation?
The straight-line method.
What happens if depreciation is not used?
The accounts would not give a true reflection of the position of the business.
What is the purpose of accruals in financial statements?
To ensure that all income and expenditure are matched to the relevant accounting period.
What is an example of an accrual?
When a business incurs an expense but has not yet received an invoice.
What is a prepayment?
An expense paid for in the current year but charged as an expense for the next year.
What is the opposite of an accrual?
A prepayment.
How do accruals appear in financial statements?
As an expense in the Profit and Loss account and as a current liability on the balance sheet.
How do prepayments appear in financial statements?
As a reduction in the appropriate expense account in the Profit and Loss account and as a current asset on the balance sheet.
What does the Receivables account represent?
The Receivables account shows the amount of money owed to the business and is considered an asset account.
What is a bad debt?
A bad debt is a debt that a business knows with certainty it will never receive.
What happens to bad debts in accounting?
Bad debts are written off, meaning the business gives up any prospect of collecting the debt, and it is removed from the Receivables entry.
When can bad debts be written off?
Bad debts can be written off during the accounting year or at the end of the financial year.
What is a doubtful debt?
A doubtful debt occurs when a business provides for the possibility that a debt may not be paid.
