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.