Financial Accounting Flashcards
What are the features of the Accruals Concept in accounting?
- Record of transactions in the year they occur, not when the bills are paid.
- Uses double-entry accounting method.
- Revenue v Expense
What are the 3 key financial statements in accounting?
- Income Statements/Statement of Profit or Loss
- Statement of Financial Position/Balance Sheet
- Statement of Cash Flow
What is the Income Statement/Statement of Profit or Loss?
- Provides information about the performance of an entity over a period of time (financial year)
- Measures owners equity at start and end of accounting period.
- Made up of income & expenses
What is the equation for profit?
Profit = sales revenue - expenses
What are the 3 different types of profit?
- Gross profit
- Operating profit
- Profit of the period
All measures how affective a manager is at running the business.
What is Operating Profit?
- Earnings before interest & tax
- Removes operating expenses, depreciation and amortisation
What are examples of expenses?
- Cost of sales
- Distribution costs
- Administrative expenses (maintenance, insurance, wages)
- Finance costs (bank interest)
- Tax expense (corporation tax)
What is an Asset?
- A resource available and controlled by the business with the expectation to produce future economic benefits
- Land, buildings, raw materials, vehicles, machines
What is a Current Asset?
- Assets acquired with intention of sale/conversion into cash in a relatively short amount of time (usually <1yr). - Cash, assets for trading, inventory, trade receivables (made credit sales), prepayment.
What is a Non-Current Asset?
Asset held for more than a year
What is a Liability?
- A present obligation of the business, where the settlement of which is expected to result in an outflow of resources embodying economic benefits.
- Debts taken to improve the health and operations of a business.
- Bank borrowing, purchasing resources/inventory not yet paid for, or tax payable to gov.
What is a Current Liability?
- Settled within a year of the balance sheet date.
- Trade payables, tax, unpaid bills (accruals), bank overdraft.
What is a Non-Current Liability?
- Settled more than a year after balance sheet date.
- Bank loans (main one), debentures, bonds, mortgages.
- Can become a current liability when payment falls within 12 months of final payment.
What is Equity?
Equity is shareholders money
Equity = Assets - Liabilities
What is the Residual Amount?
- Residual Amount = Entity’s assets - Entity’s liabilities
- The remaining value of an asset after it has been fully depreciated.
What are the components of Equity?
- Share Capital
- Share Premium
- Retained Earnings
- Other Reserves
What is Share Capital?
- Shares issued by businesses at nominal value, which are bought by investors giving the business finance through their share capital.
- Share Capital = Number of Shares * Value of Shares.
What is Share Premium?
- As business grows, value of share increases.
- Further shares may be issued in return for cash above nominal value, only applies for new issue shares, not existing shares.
- Trading of shares on a marketplace between shareholders doesn’t affect the equity capital of a business.
What is the mnemonic for Double Entry?
PEARLS
Debit entries ⬆️:
- Purchases
- Expenses
- Assets
Credit entries ⬆️:
- Revenue
- Liabilities
- Shareholders Equity
What is the difference when shareholders and sole traders take money out of the business?
- Shareholders take money out = dividends (not expense).
- Sole trader (not Ltd) takes money out = drawings (expense, personal use).
What are examples of Assets?
Cash, Account Receivables, inventory, Equipment.
What are examples of Liabilities?
Bank Loans, Account Payables.
What are examples of Owners Equity?
Share Capital, Retained Earnings, Income, Expenses.
What is included in the Financial Accounting Overview?
- Day-to-day = recording transactions (sales, purchases, cash in and out).
- Year-end = produce trial balance & year-end adjustments.
- Financial statements = prepare from accounting records & comply with accounting standards
- Accounting for Revenue, Purchases, and Cost of Sales
