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
