Financial terms Flashcards
Describe the purpose of an income statement
The purpose of an income statement is to calculate profit.
It calculates gross profit, which is the profit to the business on buying and selling inventory.
It calculates profit for the year, which is the final profit to the business before tax is deducted.
Distinguish between carriage in and carriage out
Carriage In is transport/delivery charges the business pays for getting the goods from the supplier to the business.
Carriage Out is transport/delivery charges the business pays for sending goods from the business to the customer.
carriage In is part of the Cost of Sales calculation in the Income statement.
Carriage out is an expense in the Income Statement.
Distinguish between Discount Allowed and Discount Received
Discount Allowed is discount the business has given to its customers.
Discount received is discount the business has received from its suppliers.
Describe depreciation
Depreciation is the reduction in value of Non-Current Assets due to age and wear and tear.
It is shown as an expense in the Income Statement and is included as part of the Aggregate Depreciation calculation in Statement of Financial Position.
Describe bad debts
These refer to Trade receivables who have become bankrupt or for other reasons and are not going to pay us the money they owe us. The money the customer owed the business will have to be covered by the business itself.
bad debts are shown as an Expense in the Income Statement.
Describe expenses receivable
These are expenses which we have paid this year but are not due to be paid until next year. The business has paid them in advance.
They are deducted from the total of expense paid this year in the Income Statement eg (advertising paid - advertising receivable) and are shown as a Current Asset in the Statement of Financial Position.
Describe expenses payable
These are expenses which we owe at the end of the year and should have been paid this year.
They are added to the total paid for the expense this year in the Income Statement eg (Advertising paid + advertising payable) and shown as a Current Liability in the Statement of Financial Position.
Describe the purpose of a Statement of Financial Position
This is a financial statement which shows what the business owns (assets), what the business owes (liabilities) and what the business is worth.
Describe Provision for Depreciation
This refers to the total depreciation that has been deducted from a Non-Current Asset eg Motor Vehicles over the previous years.
It is included as part of the Aggregate Depreciation (Agg Depn) calculation in the Statement of Financial Position.
The Provision for Depreciation (shown in trial balance) + the depreciation shown in the Income Statement as an expense are added together to find Agg Depn shown in the Statement of Financial Position.
Describe trade receivables
This refers to customers who owe the business money.
Trade receivables is shown as Current Assets in the Statement of Financial Position.
Describe provision for Bad Debts
This is created to retain funds in the business to cover bad debts. there is no money in a provision.
It is shown as an expense in the Income Statement when created or increased and is deducted from Trade Receivables in the Statement of Financial Position.
Distinguish between Current Liabilities and Non-Current Liabilities
Current liabilities are short-term debts which have to be paid back within a year eg Trade Payables whereas Non-Current liabilities are long-term debts which will take years to repay eg loans and mortgages
Describe Trade Payables
This refers to businesses/suppliers the business owes money to which will have to be paid back within this year.
Trade Payables are included as a Current Liability in the Statement of Financial Position.
Describe Equity
This represents the investment into the business by the owner.
It is shown as the first entry in the bottom half of the Statement of Financial Position.
Describe Drawings
This refers to money (cash/money from the bank account) or inventory taken from the business by the owner for his/her own personal use.
It is shown in bottom half of the Statement of Financial Position as a deduction.
