Financial Statements Flashcards
Define double entry bookkeeping
Every financial transaction gives rise to two accounting entries. A debit and a credit.
What do debits and credits do in terms of assets, liabilities and expenses?
A debit will:
- increase an asset
- decrease a liability
- increase an expense
A credit will:
- decrease an asset
- increase a liability
- decrease an expense
What is the trial balance?
Once all ledger accounts have been balanced off, a trial balance can be prepared. It is a list of all the ‘balance b/f’ on the ledger accounts according to whether they are a Dr or Cr.
It is the first step in producing the financial statements.
What could be the problem is a trial balance doesn’t balance?
The fact that the TB balances does not necessarily mean that all is correct. The following errors could have occurred:
- omission of an entry altogether
- opposite entry/reversed
- compensating error
- transaction posted correctly, but wrong amounts
What accounts have a debit balance for the TB, and which have a credit balance?
Debit balances:
- assets
- expenses
- losses
- drawings
Credit balances:
- liabilities
- income
- profits
- capital
What is a control account and why is it kept?
A control account is an account in which a record is kept of the total value of a number of similar but individual items.
The two main control accounts are Receivables Ledger Contol Account and the Payables Ledger Control Account.
They are kept to:
Provide a check on the accuracy of the entries in the personal accounts.
Assist in the location of errors.
Internal checks where there is a segregation of duties.
Simplifies the preparation of accounts by providing totals for the trial balances.
What is the difference between mark up and margin?
Mark up = the profit when shown as a % of cost price.
Margin = the profit when shown as a % of selling price.
Nb. Cost price + Profit = Selling Price
Where is the disposal of a NCA recorded?
Upon the sale of an NCA we need to remove it from our accounts. This means that the cost of the asset and accumulated depreciation will need to be taken out, and the profit or loss calculated.
The steps are:
- Remove the asset from the cost account.
- Remove the associated accumulated depreciation
- Account for the proceeds into the bank
- Calculate the profit or loss on disposal.
If difference on disposal is a Dr it is a profit (INCOME), of s Cr it is a loss (EXPENSE).
Where is the revaluation of a non-current asset recorded?
Some non current assets rise in value over time and businesses may choose to reflect this in their balance sheet.
The difference between the NBV and the revalued amount (normally a gain) is recorded in the revaluation reserve in the capital section of the SOFP. The gain amount is shown in other comprehensive income on the SOPL.
How do you account for the revaluation of a NCA?
Amount taken to revaluation surplus = revalued amount - carrying value
- Clear out the accumulated depreciation
- Transfer revaluation surplus to revaluation reserve
- Transfer gain or loss to the cost account with difference.
What is the acronym for the SOFP?
RCGDAPIFPTP
Really Cute Gingers Distract Accountants Preventing Infatuated Fools Passing The Paper
Revenue Cost of sales Gross profit Distribution costs Admin costs Profit from operations Investment income Finance costs Profit before tax Tax expense Profit after tax
Define asset.
An asset is a resource that is controlled by an entity as a result of a past transaction, which future economic benefits are expected to flow from.
Define liability.
A liability is an obligation for an entity to transfer economic benefit, as a result of a past transaction
Define equity.
Equity is the residual interest in a business. It represents what is left if a business is wound up, all assets sold and liabilities paid.
Define income.
Income is the inflow of economic benefit in a reporting period - sales revenue or revaluing an asset.
