FINANCIAL ACCOUNTING Flashcards
What is the Accounting Cycle?
Financial transactions Ledger Account Trial Balance Adjustments Financial Statements
Give 5 examples Source Documents:
invoices sales and purchase orders wage slips credit notes goods received notes
Accounting Equation
ASSETS = LIABILITIES + CAPITAL
Which accounts have Dr balances & which Financial Statement are they found on?
Assets – Balance Sheet
Expenses – P&L
Which accounts have Cr balances & which Financial Statement are they found on?
Liabilities and Capital – Balance Sheet
Income/Revenue/Sales/Turnover – P&L
DEAD CLIC
DEAD Debits: Increases in Debtors Expenses Assets Drawings CLIC Credits: Increases in Creditors Liabilities Income Capital
What is a trial balance
A statement of account balances arranged according to whether they are Dr balances or Cr balances.
The TB always has the date of the last day of the accounting period to which it relates.
It is a snapshot summary of the balances on the ledger accounts at that date.
The totals of the two columns must always equal and Balance (Drs must always equal Crs).
Can be drawn up at any time but at least once, at the end of an accounting period before preparing an Income Statement and Statement of Financial Position (Balance Sheet).
The Dr column equals the Cr column as for every transaction there must been an equal and opposite Dr and Cr entry (otherwise errors).
What is the expanded accounting equation
If a business makes a profit, its assets will increase and the owner’s share in the business will also increase - so we can expand the Accounting Equation:
Assets = Liabilities + Capital + Profit (Income - Expenses)
Assets = Liabilities + Capital + Profit or - Loss
Working Capital
Working Capital is current assets - current liabilities
Capital Employed
Capital Employed = total assets - current liabilities
Net Worth
Net Worth = total assets - total liabilities & is an important determinant of the value of a company, considering it is composed of:
Total money and assets invested since its inception
Less: Total Liabilities
Retained Earnings since its inception.
Uses of the Balance Sheet
Gives an estimate for the overall value of the business.
The financial structure of the business can be examined (equity/ long-term borrowing, more borrowing implies more risk)
Working Capital is useful calculation in providing information about the overall liquidity position of the business, i.e. does the company have enough current assets that can be exchanged for cash in the short-term to pay off their current liabilities.
What is an asset?
An asset is a resource owned by the business and used to generate sales and hence profit.
Examples of assets
Inventories (stock) waiting to be sold (Short term)
Money in the bank account (Short term)
Trade receivables (debtors) (Short term). Money owed to the business following credit sales to customers
Factory, vans, equipment, land, computers, furniture, etc. (Long term)
What is a definition of Non-current Assets?
Non-current Assets are those held with the intention of being used to generate income, either directly or indirectly.
They constitute the tools of the business.
Usually held on a continuing basis: in excess of one year is a guide.
