Equations and Terms Flashcards
What does Capital Expenditure mean?
Capital expenditure are expenses that we incur for acquiring an asset, for improving or replacing an existing fixed asset. (E.g Legal fees incurred on the purchase of a building)
What does Revenue Expenditure mean?
Revenue expenses are short term expenses such as operational costs (e.g repairs)
What does going concern mean?
It means that we assume that the business will continue to trade in the foreseeable future.
What does Prudence mean?
Recording transactions as accurately as possible so not over or under stated. So if stock becomes damaged then the value of the stock must be recorded as soon as it happens.
What does Useful Economic Life mean?
The length of time in which the asset is expected to be used
What does residual value mean?
Scrap value of the asset. So the net amount the business expects to receive at the end of the useful economic life and after disposal costs ( e.g delivery costs to scrap etc.)
How do you work out Carrying value if you have the accumulated and cost?
Cost - accumulated = Carrying Value
How do you work depreciable amount?
Cost of Asset - Residual value = depreciable amount
How is depreciation shown on the P&L?
As a debit as depreciation charge (an expense)
How is depreciation on the SoFP?
As a credit as Accumulated depreciation (reduced the value of the asset)
How do you calculate the annual depreciation charge for straight line?
Original cost of asset / use economic life
How do you calculate annual depreciation if it has residual value at the end of he useful economic life?
Original cost of asset - Residual Value / use economic life
How do you work out the depreciation charge as a percentage of the original cost?
Original cost * X%
How would you list a £6000 asset paying by cheque with £600 depreciation as a double entry?
Dr asset journal ( buying asset with cheque ) £6000
Cr bank journal ( cheque so is a liability) £6000
Dr Depreciation charge (expense so dr to acc dep’n) £600
Cr Accumulated depreciation (reduces value of asset to dep’n charge) £600
How do you work depreciation for diminishing balance? Say it’s 25% a year.
Cost of asset * 25% = depreciation for that year. Dep’n - (new)cost of asset
(New) cost of asset *25% = depreciation for that year. (New) Dep’n - (new) cost of asset
How would you work out depreciation using units of production?
(Normally they give a year 1 and ask if year 1 produced xxx units how much dep’n would be charged if had xxx units of production)
Cost of asset - residual value
Answer to above * Use the year 1 units / units they want answer for.
This will give the depreciation for the the units they want.
When given an invoice to put on a NCA register what do you need to remove?
Need to remove expenses such as 1 year tech support and memory sticks, items that can’t be capitalised and aren’t necessary for the asset.
Also remove VAT if it can reclaimed if it can’t then include gross (e.g vans)
If the depreciation is worked on a monthly basis then how would we calculate it?
£22,000 machine cost, dep’n is straight line at 30% to Feb - May same year
Cost of asset * dep’n percentage = annual depreciation * amount of months/12 months
22,000 * 30% = £6600 * 4/12 = £2200 for 4 months
What is the double entry to remove a disposal?
Dr disposal account
Cr non current asset cost (reducing asset)
After removing a disposal what else do you need to remove and how do you do it by double entry?
Accumulated Depreciation
Dr Accumulated Depreciation
Cr disposal account ( move it with the asset )
If you have sold the disposal then there will be proceeds what is the double entry for this?
Dr bank ( increase with the amount)
Cr disposal account
What is a gain and a loss on a disposal?
These relate to the proceeds you receive on a disposal. So the carrying value of a disposal ( cost - acc. Dep’n at the disposal year). If the carrying value is less than what you receive for selling the disposal then this would be a gain (e.g C.V £1000, but the proceeds are £1500, then have a gain of £500). If the carrying value of the asset is more than what you receive then this is a loss ( e.g carrying value £2000, sold for £1000, then made a £1000 loss.
Do you need to clear or carry forward on a P&L
Clear the balance.
How would you do double entry if it was a part exchange?
Remove disposal as normal.
Dr disposal account
Cr non current asset at cost
Remove acc depreciation
Dr accumulated depreciation
Cr disposal account
Record part exchange value
Dr new non current asset
Cr disposal account
Then show how it was purchased
Dr new non current asset
Cr bank or payables if on credit terms
Then transfer any balance to disposal account to P&L
What does IAS 2 say?
It states that inventory held should be valued at the lower cost or net realisable value ( including delivery costs etc.)
What is the net realisable value?
It’s the amount you expect to sell the asset for minus any further costs e.g selling costs
How do you work out this value of inventory?
Cost = £84000, inventory discontinued item costing £4500, sold for scrap £2400.
£84000 - £4500 + £2400 = £81900 value
Which one do I choose for inventory value?
CHOOSE THE LOWEST VALUE EITHER NET REALISABLE VALUE OR THE COST
NET REALISABLE COST OF INVENTORY - ANY EXPENSES + SCRAP VALUE
OR AMOUNT YOU PAID FOR THE INVENTORY.
What is the double entry for an irrecoverable receivable?
Dr irrecoverable debt expense
Cr receivables ledger control account
Are trade payables debit or credit?
Credit
Are trade receivables credit or debit?
Debit
What is the double entry for a doubtful receivable?
Dr allowance for doubtful receivables adjustment (will affect P&L)
Cr allowance for doubtful receivables (reducing RLCA in SoFP)
What does it mean if there is a £10,000 difference between the non current asset register and the non current asset account in the general ledger. ( non current asset £10,000 more)?
This will be the carrying amount , as you can’t really see the loss or profit only went worked out.
When given a depreciation question and it gives sold value what do you do?
Calculate depreciation up to the year, and then when get to the carrying value of that year deduct from sold proceeds to see if made a loss or profit. If carrying value higher than sold value then made a loss and vice versa for a gain. Remember if it says asset bought at the beginning of year 1, then there can really be depreciation for that year.
When putting the cost of an asset anywhere what should it include?
All that is needed for the asset to work e.g installation costs and the actual cost of asset and set up costs. Training for the asset is an expense not included in the cost of the asset. Preproduction safety testing will also be included in cost as have to have it before they can start.
What is the double entry for making an accrual for an expenditure?
Dr expense account ( increase expense)
Cr accruals ( increase liability)
What is the prepaid expenditure?
Dr prepayments ( current asset)
Cr expenses (reduce expenses)
How do you double entry for accrued income?
Dr accrued income (current asset)
Cr income account (so increasing this)
How do you double entry for prepaid income?
Dr income account (decreasing income)
Cr prepaid income ( as a liability as owe back to the tenant at year end)
Where should the opening balance for a receivable sit?
On the dr side as it’s an asset
How would you double entry for payroll ( include gross pay,paying HMRC,and pension liability)
Dr expense account with gross pay inc employs mic and pension cost for employers
Credit wages
Dr wages control (net pay)
Cr bank with net pay to say you’ve paid staff
Dr wages control
Cr hmrc alll page and nic for both employee and employer
Dr wages control
Cr pension liability for both employer and employees
Dr wages control
Cr other liabilities such as studen loan repayments, season travel tickets, subscriptions
If banks aren’t reconciling what may be the problem?
Unpresented cheques (payment)
Outstanding lodgements (receipts)
Do you add/ less outstanding lodgements and unpresented cheques?
Add outstanding lodgements
Deduct unpresented cheques
(Start with closing balance of bank statement
Add
Less
Balance per general ledger
What method would you do to find timing differences?
Match all and highlight unmatched
Input payments that aren’t on cash book that were on bank
Highlight on cash book that is not on bank
Balance cash book
Put all info on the bank rec (unpresented cheques and outstanding lodgements)
Is the PLCA debit or credit
Credit
Is the PLCA debit or credit
Credit
Are irrecoverable debts for TB debit or credit?
Debit
Are allowance for doubtful receivables credit or debit on TB?
Credit
Are allowance for doubtful receivables credit or debit on TB?
Credit
Is accumulated depreciation debit or credit on a TB?
Credit
Is an asset at cost on a TB credit or debit
Debit
What does the receivables ledger control account show?
It shows the total amount owed BY credit customers. This is shown as a DR as this is an asset. So the opening balance will be on the DR side. Cash sales will NOT be shown here! But cash receipts will be shown as has been received.
On a RLCA where does the following go (DR or CR)?
- credit sales
Credit sales - DR as customers owe us
On a RLCA where do the following go (DR or CR)?
- receipts from receivables
Receipt from receivables - CR as come into the bank already
On a RLCA where does the following go (DR or CR)?
- sales returns
Sales returns - CR as decreasing what they owe us as they are sending sales back (opposite when doing bank account)
On a RLCA where does the following go (DR or CR)?
- discounts allowed
Discounts allowed - CR as decreasing what the customer owes us (DR discounts allowed account and CR RLCA)
On a RLCA where does the following go (DR or CR)?
- irrecoverable debt
Irrecoverable debt - CR side as GROSS figure. (This is because it was shown in balance b/d but as it hasn’t been paid It needs to be taken out of there) you would DR irrecoverable debt account and VAT account
When doing double entry for contra entry’s with the PLCA and the RLCA what do you show?
You show the lowest of the figures and include GROSS figure. If we owe them then DR PLCA cr RLCA
For RLCA if sales daybook gross column is under cast what should you do?
As it’s under cast you need to increase so DR your RLCA with the figure
What do contra entry’s do?
They reduce both control accounts
What do contra entry’s do?
They reduce
If missed out a sale from RLCA how would you record it through double entry?
Cr the Net amount to individual account
Cr the VAT amount to vat account
Dr the gross amount to the RLCA
If sales returns daybook VAT column has been under cast by £630, how would you double entry with a suspense account?
Dr VAT
Cr suspense
Where does closing inventory go with the SOFP and the P/L?
Cr P/L
Dr SOFP
What does PIPCO stand for?
Professional behaviour
Integrity
Professional competency
Confidentiality
Objectivity
What does PIPCO stand for?
Professional behaviour
Integrity
Professional competency
Confidentiality
Objectivity
What does ASIFS stand for?
Advocacy
Self interest
Intimidation
Familiarity
Self review
Double entry for irrecoverable debt?
Dr irrecoverable debts
Cr receivables ledger control account
How do you work out capital employed?
Capital + non current liabilities
How to work out gross profit margin?
Gross profit/ revenue x100
What is the calculation for net profit margin?
Profit for the year / revenue x100
What is the calculation for expense/revenue margin?
Specific expense/revenue x100
What is the calculation for return on capital employed?
Profit for year / capital employed ( capital + non current liabilities) x 100
What are the fundamental characteristics?
Relevance
Faithful representation
What are the enhancing characteristics ?
Comparability
Verifiability
Timeliness
Understandability
How do you work out profit margin?
Gross profit / sales
For example.
Price is 100%
Profit is 25%
C.O.S is 75%
How do you work out profit markup?
Gross profit / cost of sales
For example.
Price is 140%
Profit is 40%
C.O.S is 100%
If there is a float at the start what does this mean when entering accounts?
Put this as a balance b/d
What is the accounting equation?
Asset - liabilities = capital
If a Trade receivables figure says after allowance for doubtful receivables?
Add the trade receivables and the allowance for doubtful debts together
When doing P&L for expenses what do you have to include?
Disposal and depreciation charge and any other expenses
What would be classed as Sunday income on a P & L?
Allowance for doubtful receivables adjustment
Are accruals liability or an asset?
A liability on the SOFP
Are prepayments assets or liabilities?
Assets
Is drawings on the p/L or the SoFP?
On the SoFP as it’s reducing the capital
When showing the final current balance after a profit and loss share, how do you calculate it?
Take their share of the profit and add onto their current balance ( if balance is a cr then minus as the asset is overdrawn) and minus any drawings
On a TB a current account shows £920 credit side what does this mean?
This means the current account shows as having a balance of £920. However if it were a dr side this would show its overdrawn.
What would be the 4 main current assets to put on a SOFP?
Bank,
Closing inventory,
Prepaid expenses,
Receivables
What would be the 3 main current liabilities to put on a SOFP?
Accrued expenses,
Payables,
VAT
At the bottom of a SOFP what do you separate for partners?
Current account
Capital account
Should all current assets be dr or cr?
Debit
Should all current liabilities be dr or cr?
Credit
At the bottom of a SOFP for a sole trader what do you include?
Opening capital from TB
Add net profit
Less drawings
Equals closing capital
At the bottom of a SOFP for a sole trader what do you include?
Opening capital from TB
Add net profit
Less drawings
Equals closing capital
What is carriage inwards?
Carriage inwards is added to purchases in cost of sales. It relates to the transport cost on the purchases
If there is a credit disposal and a debit allowance for doubtful receivables adjustment, which one is an expense and which one is sundry income?
The disposal is the income and the allowance is expense due to being a debit!
When doing adjustments in a RLCA, How do you go about doing this?
Do the opposite debit/credit.
Example, if need to put £100 sales return in RLCA, credit it. As you dr sales return account to increase and therefore credit RLCA other side
Are prepaid expenses debit or credit for telephone expenses?
Credit
Are accrued expenses credit or debit on a rates expense accounts?
Debit
When does expense ledger accounts what do you need to remember with accruals and prepayments?
If there are accruals and prepayments for last year then these need to be reversed, input bank on debit side and count any months for prepayments
How do you take the VAT off a gross figure?
Amount / 120 * 100
When doing machinery disposal double entry what are entries?
Cr Machinery at cost
Dr disposal
Cr disposal
Dr machinery acc dep’n
If person paid by cheque there will be VAT to claim if VAT registered
Dr bank
Cr VAT (vat amount taken from gross paid)
Cr rest to disposals
When putting in a part exchange to a disposals account, where does the part exchange amount go?
Credit vehicles at cost as lowering new asset
If no part exchanged where would the amount go in the disposals account?
Dr bank with amount
Disposals in accounts
Dr vehicle at cost
Cr acc dep’n
Cr part allowance / dr bank with amount
Statement of profit or loss is the difference
If the statement of profit or loss figure is on the credit side for the disposals account is it a gain or loss
It’s a loss, as on the p/L it will be shown as a debit
Account for depreciation of £1000 for the year.
Dr depreciation charge £1000
Cr specific acc. Dep’n £1000
Account for depreciation of £1000 for the year.
Dr depreciation charge £1000
Cr specific acc. Dep’n £1000
What is the materiality principle?
Anything low value will go through as an expense
What is the going concern principle
The idea that you may not be trading in the foreseeable future
If gross profit is calculated as a Revenue this called what?
Margin (gross profit is withIN gross profit so margIN)
