Financial Accounting Flashcards
What is the Statement of Profit or Loss (SoPL) also known as?
Income Statement
What is the Statement of Financial Position (SoFP) also known as?
Balance Sheet
The SoFP and SoPL provide useful information for whom?
Lenders, Investors and other creditors
Why are lenders, investors and other creditors interested in a business’s SoPL & SoFP?
The SoPL & SoFP provide useful information which help make users make economic decisions.
What are the 3 main ledgers?
- Sales Ledger
- Purchases Ledger
- General Ledger
What is the Sales Ledger?
The sales ledger comprises of individual customer accounts.
It does not use double-entry
What is the Purchases Ledger?
The purchases ledger comprises of individual supplier accounts
It does not use double-entry
What is the General Ledger?
The general ledger comprises of all the other ledgers.
Includes accounts such as wages, investments, loans etc.
It is used to prepare the trial balance.
What is a Subsidiary Account?
A subsidiary account comprises of the different bank accounts a business may have. It is part of the sales ledger and purchases ledger so is not included in the trial balance
What is a Control Account?
A control account is the Master Account of all the subsidiary accounts. It forms the Sales Ledger Control Account and the Purchases Ledger Control Account in the general ledger. It is a part of the trial balance.
What is the Sales Ledger Control Account?
It comprises of Trade Receivables
What is the Purchases Ledger Control Account?
It comprises of Trade Payables
What are the 5 main types of General Ledger Accounts? (ALICE)
Assets
Liabilities
Income
Capital
Expenses
Which of the 5 main types of general ledger accounts form the SoFP?
Assets
Liabilities
Capital
Which of the 5 main types of general ledger accounts form the SoPL?
Income
Expenses
What do Debit inputs consist of? (DEAD)
Debits
Expenses
Assets
Drawings
What do Credit inputs consist of? (CLIC)
Credits
Liabilities
Income
Capital
What is the Accounting Equation?
Assets - Liabilities = Capital
What are assets?
Things owned by the business
What are Liabilities and Capital used for?
Capital and Liabilities are what are used to fund the assets the business owns.
How is capital calculated?
Opening Capital
+ Profit
- Drawings
= Closing Capital
How are is the Net, VAT & Gross organized in the general ledger for a Purchases Day Book?
Gross -> Cr PLCA
VAT -> Dr VAT
Net -> Dr Purchases
How are is the Gross, VAT & Net organized in the general ledger for a Sales Day Book?
Gross -> Dr Sales Ledger CA
VAT -> Cr VAT
Net -> Cr Sales
What are the 6 stages of the Accounting System?
- Financial Transactions
- Financial Documents
- Books of Prime Entry
- The ledgers (double entry)
- Trial Balance
- Financial Statements
Explain the stages of the Accounting System
- Financial Transactions - An exchange of goods, services or assets for payment
- Financial Documents - Evidence of a transaction
- Books of Prime Entry - Gathering and summarising accounting information
- The ledgers (double entry) - Record dual aspect of business transactions
- Trial Balance - Arithmetic checking of double-entry bookkeeping
- Financial Statements - SoPL / SoFP
What is a trial balance?
A Trial Balance is a list of general ledger account balances.
How is the SoPL Calculated?
Income - Expenses = Profit or Loss
How is the SoFP Calculated?
Assets - Liabilities = Capital
What does the SoPL show?
Performance for an accounting period (part of double entry bookkeeping).
What does the SoFP show?
Financial position as at the end of an accounting period.
What is the Adjustment Column in an Extended Trial Balance usually used for?
- Irregular Transactions
- Correction of Errors
What changes must be made to the accounts at the end of the year?
All Income and Expenses Accounts are closed off (transfer to SoPL)
All Assets, Liabilities & Capital Accounts are balanced and carried forward.
What is Cash Accounting?
Record transactions only when cash is paid or received
What is Accrual Accounting?
Recording transactions as and when they occur, regardless of whether cash is paid or received.
Match Income and Expenses incurred for the same period.
What is the General Principle for Accruals and Prepayment?
Accruals increase the Income or Expenses Account.
Prepayments decrease the Income or Expenses Account.
What must always be done to accruals and prepayments at the start of a new year?
All Accruals and Prepayments must be reversed.
Where does the closing inventory of the SoPL go in the extended trial balance?
Credit
Where does the closing inventory of the SoFP go in the extended trial balance?
Debit
What is the three step process in accounting for Capital transactions?
1.Acquisition
2. Usage (depreciation)
3. Disposal
What is the cost of an asset made up of?
Purchase price + Attributable costs.
What are some attributable costs of an asset?
- Delivery costs
- Setup costs
- Assembly costs
- Installation costs
- Testing costs
- Professional Fees (surveyors, lawyers etc.)
Forms of revenue expenditure cannot be classed as attributable costs e.g. servicing, maintenance, running costs etc.
What is a Journal?
It is a Daybook for irregular transactions.
When can VAT be included in depreciation
Only if the business is not VAT registered, as registered businesses would just be able to claim the VAT back.
What is the role of a Financial Accountant?
- Recording financial Transactions
- Maintaining Accounting Records
- Producing Accounts / Reports
What is the role of a Management Accountant?
- To obtain information about costs
- To interpret and prepare reports for owners/managements decision making, planning and control.
Is the Purchases Ledger Control Account a Debit or Credit Account?
Credit
Is the Sales Ledger Control Account a Debit or Credit Account?
Debit
What Errors can be shown in a Trial Balance
- Calculation errors
- Single Entry
- Two Debits or Credits
- Different Amounts
- Incorrect transfer to Trial Balance
- Missing Account
What is the difference between a SoPL and SoFP?
A SoPL shows the profitability and performance of a business during an accounting period.
A SoFP shows what a business is worth (financial position) at the end of the accounting period. They are prepared by an Extended Trial Balance.
How are Accounting Periods linked in the two Financial Statements?
A SoPL covers a specific period, and a SoFP shows the state of the business on the last day of that period.
“SoPL for the year ended 31st March 2024”
“SoFP as at 31 March 2024”
What does an Extended Trial Balance include?
- Period End Adjustments
- SoPL - Part of Double Entry Bookkeeping
- SoFP - List of Account Balances
What Adjustments may be made in a Trial Balance?
- Accruals
- Prepayments
- Depreciation/Amortisation
- Irrecoverable Debts & Allowance for Receivable Debts
- Inventory
What is the 6 Step process in completing an Extended Trial Balance?
- Complete Trial Balance and ensure it balances
- Deal with any adjustments - make sure debits & Credits balance
- Transfer to SoPL (Sales, Purchases, Expenses and Opening Inventory)
- Transfer to SoFP (Assets, Liabilities, Capital and Drawings
- Balance the SoPL Account - If the figure is a Debit = Profit / Credit = Loss
- Complete the Double Entry in the SoFP - both columns should balance.
What happens to the accounts at the Year-End?
- Income & Expenses Account Balances transferred to SoPL
- Balances reset to 0 for new year (except for inventory, accruals and prepayments)
- Balances on SoFP carried forward
- After income & expenses accounts and SoPL completed, the Profit/Loss is transferred to owners capital account in SoFP
What does the Capital Account involve?
The capital account is the amount the owner has invested in the business.
Derived from the following accounts in the Trial Balance:
- Capital Introduced
- Profits for the year (or losses)
- Drawings
Does not appear on the Extended Trial Balance.
What is an Accrual of an expense?
The amount due for an accounting period for which the expenses have not yet been invoiced or accounted for.
Dr Expenses (SoPL)
Cr Accruals (SoFP - Current Liability)
An accrual of an expense reduces profit (SoPL) and Increases Liability (SoFP)
What is a Prepayment of an Expense?
A payment made in advance.
Prepayments are deducted from expenses so:
- Cr Expense a/c (SoPL)
- Dr Prepayment a/c (Current Asset in SoFP)
A Prepayment will increase profit and increase assets
What is an Accrual of Income?
Goods or Services delivered but not yet paid for.
In Adjustment column:
Dr Accrued Income (Current Asset SoFP)
Cr Income (SoPL)
Increases profit (SoPL) and Increases Assets (SoFP)
What is a Prepayment of Income?
Income paid in advance.
Adjustment:
Dr Income (SoPL)
Cr Prepaid Income (SoFP - Current Liability)
Reduces Profit and Increases Liability
How to account for Private Expenses and Goods for own use
Expenses: (where there is an element of private and business use)
- Dr Drawings a/c
- Cr Expense a/c
Goods for Own use:
Dr Drawings a/c
Cr Purchases or Sales a/c
What is Receipts & Payments Accounting?
Deals only with receipts and payments made in the period
What is Income & Expenditure Accounting?
Include credit sales and purchases.
What is the Accruals Principle of Accounting?
Matches income and expenses relating to the same accounting period regardless of when payment or receipts are made.
Which accounting standard sets out the rules for Depreciation?
International Accounting Standard (IAS) 16
Which Non-current assets must be depreciated according to IAS 16?
All non-current assets that have a known useful life are to be depreciated
What depreciation methods can be used?
The Straight-line method
Diminishing (reducing) Balance
What is depreciation?
Depreciation is the estimated amount of loss in the value of non-current assets over its useful life.
How is depreciation recorded?
- As a non-cash expense (SoPL)
- Non-current asset and Accumulated Depreciation
What is the Straight-Line method of calculating depreciation?
A fixed percentage or fraction is written off the original cost of the asset each year.
What is the Diminishing (reducing) Balance method of calculating Depreciation?
A fixed percentage is written off the diminished balance (i.e. the Carrying Amount) of the asset each year.
How is the Carrying Amount calculated?
Carrying Amount = Cost - Accumulated Depreciation
What does the term “Useful Life” mean?
Useful Life is the number of years the company expects to use the asset.
What does the term “Residual Value” mean?
Expected (resale) value of the asset at the end of its life.
What does a Depreciation % mean?
The rate of depreciation as a % of either cost (Straight-Line) or Carrying Amount (Reducing Balance)
How is the Annual Depreciation calculated in Straight-Line Depreciation?
(Cost of Asset - Residual Value) / Useful Life of Asset
What is the Units of Production method of calculating Depreciation?
Depreciation is calculated based on output (e.g. units, hours or miles)
Features of Straight-Line Depreciation
- Same Depreciation Charge every year
- Lower Depreciation % required to reach residual value
- Best used for assets with nil/low residual value
Features of Reducing Balance Depreciation
- Reducing Depreciation Charge every year
- Higher Depreciation % required to reach residual value
- Best used where assets lose high value in early years
What is the process of accounting for non-current assets?
- Acquisition of Non-Current Asset
- Depreciation (usage)
- Straight-Line
-Diminishing Balance - Disposal
- Cash or Credit
- Part Exchange
What is the accruals concept?
The accruals concept is a fundamental principle of accounting.
It requires us to match the income and expenses of a period, to that period - regardless of when the money actually changes hands.
We record income and expenditure on delivery dates, rather than when we pay for them.
What is the difference between purchases and expenses?
Purchases are goods that a business will buy to sell to others.
Expenses are payments for goods and services that support the business but are not sold by the business.
What are expenses?
Day-to-day running costs not directly attributable to the product.
Often referred to as overheads.
Examples of Current Assets
Inventory, accounts receivable, prepayments, cashbook, petty cash.
Examples of Non-current Assets
Plant & machinery, fixtures & fittings, other assets used for more than one year.
What are Liabilities?
Monies owed by the business to others.
E.g. Accounts Payable, HMRC Liabilities, Accruals, Loans and Overdrafts.
What is Debit
An accounting entry that:
Increases an Asset or Expense account
OR
Decreases a Income, Capital or Liability Account
What are Drawings?
This is money that the sole trader or partner of a business withdraws from the business.
Any goods that an owner has taken from the business for their own use are also classed as drawings.
What is a Credit?
A Credit increases an Income, Liability or Capital account.
OR
Decreases an Asset or Expense account.
What is Capital?
Money the owner puts into the business.
What is the Double-entry for a Cash Sale?
Dr Cash Book
Cr VAT
Cr Sales
What is the Double-Entry for a Credit Sale?
Dr Accounts receivable
Cr VAT
Cr Sales
How to Balance a Ledger Account
- Add up each side of the account
- Enter the larger total on both sides
- Enter a balancing figure into the side of the account that had the lower balance
- Label it “Balance c/f”
- On the opposite side of the account, under the total balance, repeat the balance c/f amount with the label “Balance b/f”
What is Capital Expenditure?
An expenditure incurred on the purchase, alteration or improvement of non-current assets.
What attributable costs are included in Capital Expenditure?
- Delivery of non-current assets
- Installation of non-current assets
- Improvement (but not repair) of non-current assets
- Professional Fees e.g. Legal Costs of buying a property
What is Revenue Expenditure?
Revenue Expenditure is expenditure incurred on running expenses.
What types of costs does Revenue Expenditure include?
- Repair, maintenance & servicing of non-current assets
- Administration and general overheads of the business
- Selling and distribution of goods
What are Irrecoverable Debts (Bad Debts)?
These are debts owed to the business that it considers will never be paid.
What is the Allowance for Doubtful Receivables?
This is an estimate by the company of all the debts that may become irrecoverable.
It is expressed as a % of trade receivables less irrecoverable debt.
How is a trade receivable written off as irrecoverable?
During an accounting period:
- Dr Irrecoverable debts
- Cr Trade Receivables
At the end of the financial year (close off account)
- Dr SoPL
- Cr Irrecoverable debts
What is a Recovery of a Bad Debt?
When a trade receivable previously written off makes payment for its debt.
This is a rare event.
What is the entry for the recovery of a bad debt?
Dr Bank
Cr Irrecoverable Debt a/c
What are the two accounts for Allowance for Doubtful Receivables?
- Allowance for Doubtful Receivables: Adjustment Account - records the amount to create, increase or decrease the allowance each year. (shown in the SoPL of the ETB)
- Allowance for Doubtful Receivables Account - Records the accumulated total of the allowance. (shown in the credit column in the SoFP of the ETB)
What are the steps for an initial creation of an allowance for doubtful receivables?
- Estimate the percentage of doubtful trade receivables
- Calculate Allowance
- Record Allowance in the double-entry
- Dr AFDR:ADJ
- Cr AFDR - Close off account
- Dr SoPL (as an expense)
- Cr AFDR:ADJ
Where is the amount of the AFDR shown in the Financial Statements?
- A debit in the SoPL columns
- A credit in the SoFP columns
How to adjust for an increase in the AFDR
- Dr AFDR:ADJ
- Cr AFDR
Close off Account
- Dr SoPL (as an expense)
- Cr AFDR:ADJ
How to adjust for an decrease in the AFDR
- Cr AFDR:ADJ
- Dr AFDR
Close off Account
- Cr SoPL (as an Income)
- Dr AFDR:ADJ
Where is the AFDR:ADJ shown in an Extended Trial Balance?
Shown in the SoPL.
Where is the AFDR shown in the Extended Trial Balance?
In the credit column of the SoFP
What is the general purpose of accounting (financial reporting)?
To provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources.
What is the purpose of the Statement of Profit or Loss (SoPL)?
To measure the financial performance of the company for a particular time period (i.e. the accounting period)
What is the purpose of the Statement of Financial Position (SoFP)?
To list the assets, liabilities and equity (capital) at the end of an accounting period.
What is the purpose of a Statement of Cash Flows?
To link profit with charges in assets and liabilities and the effect on the cash of the company.
What are the three main areas of the Framework of Accounting?
- Accounting Principles
- Accounting Policies and Characteristics
- Ethical Principles
What are the two main Accounting Standards?
- International Financial Reporting Standards (IFRS)
- International Accounting Standards (IAS)
What are the 7 Accounting Principles?
- Business Entity
- Materiality
- Going Concern
- Accruals
- Consistency
- Prudence
- Money Measurement
What is the purpose of the Accounting Principles?
They help ensure that financial information is:
- Relevant and reliable to users
- Comparable and understandable
What is a Business Entity in the Accounting Principles?
The owners and the business are two separate legal entities.
What is Materiality in the Accounting Principles?
Items that are of low value are not worthwhile recording in the accounts separately.
What is Going Concern in the Accounting Principles?
Going Concern presumes that the business to which the financial statements relate will continue to trade in the foreseeable future.
What is Accruals in the Accounting Principles?
Requires that income and expenses are matched so that they relate to the same goods or services and the same accounting period.
What is Consistency in the Accounting Principles?
When a business adopts particular accounting policies, it should continue to use such policies consistently. It allows direct comparison between different years.
What is Prudence in the Accounting Principles?
Requires that caution is exercised when making judgements under conditions of uncertainty. Meaning, where there is any doubt, report a conservative (lower) figure for profit and the valuation of assets.
What is Money Measurement in Accounting Principles?
Refers to the fact that the accounting system uses money as the common denominator for recording and reporting all business transactions. Thus it is not possible to record loyalty of employees or quantity of products etc.
What are Accounting Policies?
Accounting Policies are methods used by a business to show effect to financial transactions, and to record assets and liabilities in the SoFP.
E.g. Depreciation Policy, Inventory Valuation Policy etc.
What are the two Fundamental Qualitative Accounting Characteristics that Accounting Policies should meet?
- Relevance - Must be useful to users and must be material
- Faithful Representation - Correspond with transaction, neutral, free from error, and complete
What are the four Enhancing Characteristics that support the fundamental principles?
- Comparability - can be compared with previous years r similar entities
- Verifiability - Users are assured information
- Timeliness - Available in time to make decisions
- Understandability - Presented clearly and concisely
What is Material Misstatement?
When information contained in the financial statement is untrue - accidentally or intentionally - and could influence the economic decision of users.
Materiality - means the amount of misstatement must be significant in relation to the size of the business.
What are the Ethical Principles that should be applied when preparing Financial Statements? (PIPCO)
- Integrity
- Objectivity
- Professional Competence & Due Care
- Confidentiality
- Professional Behaviour
What is Professional Skepticism?
- Having a questioning mind
- Being alert to possible error or fraud.
- Making a critical assessment of evidence
How should inventory be valued according to IAS 2?
Inventories are to be valued at the lower of cost and net realisable value.
Different items or groups of inventory are compared separately.
What makes up the cost of inventory?
- Purchase Price
- Delivery costs
- Costs of conversion (i.e. manufacturing cost including labour. Excludes storage of finished goods and selling cost)
What is Net Realisable Value?
The estimated selling price, minus the estimated cost to get the product into the condition necessary to complete the sale.
What are the two methods of valuing inventory under IAS 2?
FIFO - First in, first out.
AVCO - Average Cost.
How do the different methods of inventory valuation effect profit?
Assuming prices are rising:
FIFO - Highest profit because the closing inventory is higher, as it based on latest prices.
AVCO - In between.
LIFO - Lowest profit as closing inventory is lower, being based on older prices.
This is the opposite if prices are falling.
What are the rules to remember for Closing Inventory?
Higher Closing Inventory = Higher Profit
Lower Closing Inventory = Lower Profit
What are the rules to remember for Opening Inventory?
Higher Opening Inventory = Lower Profit
Lower Opening Inventory = Higher Profit
What is the difference between Profit Margin and Profit Markup?
Margin: Express as % of Sales = Gross Profit/Sales x 100
Markup: Express as a % of Costs = Gross Profit/Costs x 100
How are financial records & statements made useful to users through the accounting principles?
Internal Control - Ensure records are accurate and true.
Measuring performance - Compare internally & externally
Obtaining credit/financing - provide to lenders/creditors
Statutory requirements - Tax purposes
What is the structure of the SoPL?
Sales
Opening Inventory
+ Purchases
- Closing Inventory
= Cost of Sales
Gross Profit (Sales - Cost of Sales)
- Expenses
= Net Profit
What does in the Debit side and what goes in the Credit side of an RLCA account?
Sales will always go in the Dr side
Anything that reduces the receivables will go on the Cr side.
PLCA
Purchases will always go on the Cr side
All other entries on the Dr side
VAT Control Account
Purchases on the Debit
Sales always goes on the Credit side
Bank
Money in - Debit
Money Out - Credit
Which accounting standard sets out the principles for depreciation?
International Financial Reporting Standard (IFRS)
IAS 16 - Property, Plant and Equipment
What is the double entry for depreciation?
Regardless of the method used for its calculation, the depreciation charges are always recorded in the same way.
Dr Depreciation charge (this account is shown on the statement of profit or loss).
Cr Accumulated depreciation (this account is shown on the statement of financial position).
How to calculate Straight Line Depreciation
Cost - residual value / Useful economic life
What is the 4 step process to disposing an asset?
- Remove the Asset (Dr Disposal + Cr Asset)
- Remove the Accumulated Depreciation (Dr Accum Dep + Cr Disposal)
- Record Proceeds (Dr Bank + Cr Disposal)
- Transfer Gain / Loss to SoPL (Gain: Dr Disposals + Cr SoPL, Loss: Dr SoPL + Cr Disposals)
What type of account is the Receivables Ledger Control Account?
It is an Asset account. Therefore, to show an increase, the account should be debited and to show a decrease, it should be credited.
What type of account is the Paybles Ledger Control Account?
It is a Liability account. Therefore, to show an increase, the account should be Credited and to show a decrease, it should be Debited.
Which side of the VAT account is the Input VAT side and which is the Output side?
The Debit side is the Input side and the Credit side is the output side.
Which side of the Bank is money in and which is money out?
Money in is debit side, Money out is credit side.
What is a Journal?
A journal is a daybook for irregular transactions.
What is a Journal used for?
- Year end transfers and adjustments
- Purchase and sale of non-current assets on credit
- Correction of errors found in the double entry
Why is the Allowance for Doubtful Receivables Account a Credit account?
Because it reduces the receivables account, which is a debit account.
How is an account closed off?
Income and Expenses accounts are closed off by matching the balance on both sides of the account.
This is done by transferring the difference to the SoPL.
What must be done to the accrual and prepayments at the start of a new year?
They are reversed
Do accruals increase or decrease an expense account?
Increase
Do Prepayments increase or decrease an expense account?
Decrease
When making the SoPL, why can’t the sales figure be used as it is?
The Sales Returns must be taken off first
When making the SoPL, why can’t the Purchases figure be used as it is?
The Purcheses Returns must be taken off first
When making the SoFP, why can’t the Trade receivables figure be used as is?
The AFDR must be deducted first.
Characteristics of an ordinary partnership
between 2 and 20 partners
Characteristics of an LLP
Any more than two members
Difference between sole trader and partnership statement of financial position
Sole traders have only a capital account in the “financed by” section at the end of the statements which includes start up capital, drawings and profit.
In a partnership, the “financed by” section has a capital account which only includes the start up capital. There is also another account called the current a/c that holds all other transactions such as drawings and profit.
Difference between sole trader and partnership Statement of Profit and Loss
In a partnership, immediately after the SoPL, follows an appropriation account which shows how the profit/loss is shared amongst the partners.
What is the double entry for a cash sale?
Dr Cash Book
Cr VAT
Cr Sales
What is the double entry for a credit sale?
Dr Accounts receivable
Cr VAT
Cr Sales
What is the double entry for a cash sales RETURN?
Dr Sales return
Dr VAT
Cr Cash book
What is the double entry for a credit sales RETURN?
Dr Sales return
Dr VAT
Cr Accounts receivable
What is the double entry for a cash purchase?
Dr Purchases account
Dr VAT
Cr Cash book
What is the double entry for a credit purchase?
Dr Purchases account
Dr VAT
Cr Accounts payable
What is the double entry for a cash purchase RETURN?
Dr Cash book
Cr Purchases return account
Cr VAT
What is the double entry for a credit purchase return?
Dr Accounts payable
Cr Purchases return account
Cr VAT
What is the double-entry for recording depreciation?
Dr Depreciation charge (this account is shown on the statement of profit or loss).
Cr Accumulated depreciation (this account is shown on the statement of financial position).
How to calculate the annual depreciation charge for straight-line depreciation without the percentage?
(Cost - residual value)/Useful economic life
What is step 1 for disposing a non-current asset?
Create a disposals account. This is a temporary account which we are going to use to calculate a gain or loss on disposal of the asset.
Transfer the cost and accumulated depreciation on the asset into this account by means of double entry.
Dr Disposals
Cr Non-current asset - cost
Dr Accumulated depreciation
Cr Disposals
The asset has now been removed from the ledger accounts into the disposals account.
What is step 2 for disposing of a non-current asset?
Record the receipt of disposal proceeds.
Dr Bank
Cr Disposals
What is step 3 for disposing of a non-current asset?
The balancing figure on the disposals account, which represents the gain or loss on disposal, is transferred to the statement of profit or loss.
If a balancing figure is needed on the debit side of the disposals account:
Dr Disposals
Cr Statement of profit or loss
this represents a gain on disposal.
If a balancing figure is needed on the credit side of the disposals account:
Dr Statement of profit or loss
Cr Disposals
this represents a loss on disposal.
How is Profit Mark-Up calculated?
Mark-up is always calculated based on the cost of sales. It can be helpful to remember that mark-up puts the profit on top of the cost. When using mark-up the cost of sales figure always represents 100%.
How is Profit Margin calculated?
Margin is always calculated on the sales figures. To remember this, think of the margin being included in the sales price.
What represents 100% in Profit Mark-up?
The cost of sales
What represents 100% in Profit Margin?
The full price i.e. the gross profit/sales figure
How is Cost of Sales calculated?
Opening Inventory
+ Purchases
-Purchase Returns
-Closing Inventory
= Cost of sales
How is Gross Profit Calculated
Sales - Cost of sales = Gross Profit
What is the cost of an asset?
Original purchase price plus any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended, and any estimated cost of dismantling and removing the item and restoring the site on which it is located.
What goes in the Debit side of the current account?
Drawings
Goods for own use
Interest charged on drawings
Loss share
Balance c/d
What goes on the credit side of the current account?
Balance b/d
Salary
Interest on capital
Profit Share
How to calculate return on capital employed?
Profit / Capital + Non-current Liabilities
What are the rules of the Partnership Act 1890?
- Profits and losses are to be shared equally between the partners.
- No partner is entitled to a salary
- Partners are not entitled to receive interest on their capital
- Interest is not to be charged on partners drawings
- When a partner contributes more capital than agreed, they are entitled to receive interest at 5% per annum on the excess
