Intro into Accounting Flashcards
Capital Expenditure
Expenditure on the purchase, alteration or improvement of a NCA: (LIDIC)
Legal costs of buying property
Installation of NCA
Delivery of NCA - ‘carriage’
Improvement (not repair) of NCA
Cost of NCA (incl wages paid for installation/ improvement of NCA)
Capital income
Income from the sale of a NCA
Revenue Expenditure
Expenditure on running costs
(MITRA) :
Maintenance
Insurance
Training
Repair of NCA
Any other running costs associated with the business
Expenses or COS on I.S
Revenue income
Sales revenue from providing goods and services and other income-> interest , rent & commissions received
Name the types of books of original entry
Sales day book —> for credit sales
Purchase day book —> for credit purchases
Returns inwards day book —> for returns inwards
Returns outwards day book —> for returns outwards
Cash book —> for receipts and payments for cash & cheques
General journal—> for all other items
Terms used in a limited company income statement
Profit from Operations- Gross profit + Other income - Expenses
Finance cost is Interest Payable on NCL such as bank loans
Tax is the corporation tax on profit made by the company this year
Profit for the year = Operating Profit- Finance Costs- Tax
Explain one limitation of the purchase ledger control account and give one example
The PLCA verifies the arithmetical accuracy of the ledger, but doesn’t prove that each individual account balance is correct.
E.g Error of Omission: where a transaction has been completely omitted from the records
Give the benefits of preparing a PLCA
Give the total trade payable —>useful for preparing financial statements and trial balances.
Checks arithmetic accuracy —>compares total balance on account with total on individual balances on personal account.
Prevents fraud —>would have to tamper with both the purchase ledger and the CA
Explain how the PLCA can be used to verify the balances in the purchase ledger
The balance on the PLCA should agree with/ the total of the individual account balances
Business paid for his family’s holiday from the business bank account and recorded the payment as drawings. Which account and concept has been applied?
Business entity
Example of business entity concept
A car bought for private use can’t be claimed as an asset on the balance sheet and cannot be depreciated on the profit and loss. If the business was to purchase the car and then it was solely used for personal use then the car would have to be taken as a drawing by the owner.
List the errors which do affect the trial balance
PUPAT
Posting - where there’s 2 debit (or 2 credit) entries
Unequal posting - the dr side of the posting doesn’t equal the credit side
Partial omission - one side of the transaction not posted
Addition - in the trial balance /ledger account over/understating figures in one account
Transportation - e.g one entry posted as £67, the reverse entry posted as £76
Name the accounting concepts
Cost ,going concern, accruals, consistency, prudence, materiality, realisation, business entity, duality, money measurement
Identify four items contained in the annual report and accounts of a limited company other then the profit and loss accounts and balance sheet
Directors reports
Auditors report
Cash flow statement
Notes to the accounts
Why does a trial balance balance?
All the debit and credit entries are equal to one another -there’s a debit to every credit
How might it be possible for a trial balance to not balance?
When the debit and credit entries haven’t been added up properly and therefore are not equal to one another
State one purpose of cash and trade discounts
Cash discount is given to encourage prompt payment .
Trade discount is given to encourage bulk purchase/or to encourage repeat customers
Define depreciation
A fall in value of a fixed asset due to wear and tear, etc
Give the purpose of control accounts
CA must balance with The total of the individual accounts
checks for errors
minimises the potential for errors and localises errors to the general ledger
Define control accounts
An account in the main ledger which summarises the transactions in a number of other accounts
Define nominal value and market value
Nominal value - the face value of shares that shown on SOFP as part of total equity
Market value - the price at which shares that’ve previously been issued or traded I.e showed to new shareholders -not shown on the SOFP
Explain the main purpose of the cashbook
To keep track of funds flowing into and out of the business
Define source document
evidence of a transaction ,produced for each and every transaction, to ensure accuracy and limits potential for fraud or bias
Define social accounting
The process of communicating the social and environmental effects of businesses
Define stakeholder
A party that takes an interest in an organisation as they can effect of be affected by business’ performance
Name the stakeholder of financial accounts
Managers, customers, employees, suppliers, government, investors and shareholders, lenders & competitors
Irrecoverable debts
An account owing from a customer, which has to be written off in the account because the customer doesn’t have the funds to pay the debt
Dividends paid
Number of shares x Dividends per share
No of shares = share capital / nominal value of each share
Worked example:
100,000 shares each receiving a dividend of £0.04
Dividend paid= 100,000 x £0.04 = £4000
What goes on the debit and credit side of PLCA
Dr:
Returns Outwards
Cash/ cheque paid to suppliers
Discount received
Contra
Cr:
Opening balance
Total of all credit purchases
Dishonoured cheque by US (+ discount)
What goes on the debit and credit side of SLCA
Dr:
Opening balance
Total of all credit sales
Dishonoured cheque from customers (+ discount)
Cr:
Return inwards
Cash/cheque received from customers
Discount Allowed
Contra
Irrecoverable Debt
Receipts from customers
Partnership income statement & appropriation accounts
Identical to sole trader IS . After the PFTY:
SUBTRACT interest on partners’ loans from the PFTY
Complete the appropriation account:
+ Interest charged on partners’ drawings
- Salaries paid to any of the partners
- Interest on partners’ capital account
The remaining profit/loss is SHARED between the partners
What goes on the debit and credit side of a Current Account
Dr:
Share of loss
Drawings/ Goods for own use
Interest on Drawings
Bal C/D
Cr:
Bal b/d (if POSITIVE)
Share of profit
Salary/commission
Interest on capital
Interest on loan
Other adjustments to gross profit- GTFOU, NCA wrongfully included in purchases, Reducing inventory value- effect on Income Statement
Goods taken by the owner for their own use will INCREASE GP= DECREASES C.O.S
NCA wrongfully incl in purchases = INCREASE GP = DECREASE COS.
Reducing the value of closing inventory will DECREASE GP = INCREASES COS.
Define prepayment
A payment made in advance of the current period
Explain the following accounting terms: accrued expenses, prepaid expenses, cost of sales
Accrued expenses: business cost which are due but unpaid at the end of the current accounting period.
Prepaid Expenses: an expense that’s been paid in advance which relates to the next accounting period.
Cost of sales: the cost of goods actually sold in the current accounting period after adjusting purchases for opening and closing inventory.
NCA is wrongfully included in purchases or expenses
Debit (increase) the cost of the NCA on the SOFP
Credit (decrease) ‘purchases ‘ or the expense on the I.S
Give the partnership act 1980
When no partnership agreement exists:
1. partners must contribute equal amounts of capital
2. 5% loan per annum
3. No interest on drawings
4. No interest on capital
5. No salary
6. Profits and losses are to be shared equally.
What goes on the debit and credit side of Profit and loss appropriation account
Dr:
Interest on Capital
Partners’ salaries
Bonus paid to partners
Share of profit
Cr:
Net profit from P&L account (b/d fig)
Share of loss
Interest on drawings
Double entry to the current account
State what is found in both the sales and purchase ledger
Sales ledger: all of our trade receivable accounts
purchase ledger: all of our trade payable accounts
Name the five steps involved in the accounting cycle
1.Source documents
2.books of original/prime entry
3.ledgers/ double entry accounts
4. trial balance
5.financial statements
What are the objectives of accounting?
To let people/organisations know :
if they make a profit or loss
what their business is worth
how much they owe/ are owed
how much cash they have
what a transaction is worth to them
Give the benefits of social auditing
Govs can use it to decide on legalisation/regulation
Valuable information to pressure groups and consumers
Allows managers to gain a complete picture of the impact of the businesses activities
State a few reasons why it is essential for a business to keep accurate accounting records
To produce accurate records ensuring you aren’t under/overpaying
to understand manage and control debts
helps in detecting thefts within the business itself
provides management more information to base business decisions on
Define returns inwards and returns outwards
Returns in :when an item is returned the item returns as stock and there is no profit made
return outwards :stock that won’t sell/no longer need so you return it to the supplier
Describe what is meant by a contra entry
Arises if a business sells goods to and also buys goods from the same trader
Name the 7 sources of finance
Owners capital
partners capital
share capital
debentures
bank loans
mortgage
bank overdraft
Define credit transfer
Amounts paid into and out of an account directly through the banking system instead of by issuing a cheque
Define accounting
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information
Describe trade discounts
Discounts given to companies who trade in the same area or are bulk buying.
They are NOT recorded in the double entry system
Identify two uses of the general journal
Correction of errors
Transfer of amount from one general ledger account to another
Transfer of opening balances
State who owns a private limited company
Shareholders
Explain the term limited liability
When the owner and the company are separate entities
State who is responsible for the day-to-day management of a private limited company
Director
List the advantages of becoming a limited company
More capital can be raised by selling shares.
The shareholders have limited liability which means less risk. The most they can use is what they paid for their shares ;they don’t have to provide any more money to pay the company’s debts
Define outstanding lodgements
Payments made to us by debtors that we have entered into the cashbook which the bank has yet to receive
Define unpresented cheques
Cheques we’ve made and sent to our suppliers, however the amount has yet to be taken from my bank
Define dishonoured cheques
Cheque which have been entered into the books, but when presented to the bank, the payee doesn’t have enough money to make the cheque
Define accruals
An estimate of money that’s owed, but which has not yet been paid
Describe the role of the trial balance
It checks that each transaction has been entered once on the debit side of an account and once on the credit side of another account.
It is used to prepare the income statement and balance sheet.
Define standing orders
amounts paid from one bank to another on a regular basis the amount can NOT be changed by the receiver
Define social auditing
A process of reporting on, collecting evidence or improving a businesses performance to ensure it’s making an effect on society
Explain the main purpose of the purchase day book
To keep a record of all invoices received from credit suppliers
Define the accounting term: trial balance
A summary of all the entries in the double entry system
Define direct debit
Amounts paid from one bank to another on a regular basis, the receiver of the money has the ability to request that the amount taken each month is changed
Explain why the balance is shown as a debit in Emma’s records but is shown as a credit on the bank statement
The cash book is prepared from the business’ viewpoint and represents an asset.
The bank statement is prepared from the bank’s viewpoint and represents a liability.
Describe the role of bookkeepers
They’re responsible for recording day to day business transactions including:
Maintaining accounting records.
Entering transactions in the books of prime entry and the ledgers.
Checking the accuracy of accounting records.
They may assist in the prep of financial statements by prepping the trial balance
State three benefits which Emma can expect from keeping full account records
Reduces chance of fraud (by checking if cash stolen)
To aid effective decision making
Provide support for bank loan applications
Give the advantages of becoming a plc
Large amounts of capital raised by issuing shares through the stock market.
The capital raised through the sale of shares can be used to expand the business (instead of a bank loan).
Expansion leads to higher levels of profit.
Give the disadvantages of plc
Profits have to be shared with a large number of shareholders.
Original owners probably lose control as they own less than 50% of the shares.
Financial statements are freely available on the company’s website
Limited company
A separate legal entity to the people who own/run it.
A company must have a minimum of 2 shareholders but there’s no maximum.
It’s controlled and ran by directors, who are appointed by the shareholders.
In a small company , the main shareholders may also be the directors.
The profits are payable to the shareholders in the form of dividends, although some of the profits are usually retained in the business for the future use
Which documents are required to set up a limited company
The Memorandum of Association
The Articles of Association
(Submitted to Companies House)
Terminology used in a limited company SOFP
Authorised share capital- the max share capital that a company can issue (isn’t apart of the total Equity calculation)
Issued share capital- the amount of share capital that a company has issued shown at nominal value
Capital reserves ( revaluation reserve & share premium) are created because of non trading profit
Revaluation reserve - created when a NCA is revalued at higher value than was previously e.g if land is revalued from £350k to £400k, the £50k increase is ADDED to the R.R
Share premium- created when shares are issued at a higher amount than their nominal value
Revenue reserve- (retained earnings) the accumulated profits from trading activities that’ve been retained in the company rather than paid out to shareholders
Financial Considerations when deciding which investment to choose
Which has the shorter payback and would be less risk
The availability of finance from the banks and share issue - gearing
How much an investment will be worth at the end of the project - residual value
What does a Low NPV indicate
The project isn’t expected to make much money compared to what was invested -> suggests profits are small , high risk and there are better ways to spend the money -> investors may not see it as worth it
Cost of capital
Used to calculate how much our money will reduce in value each year- used instead of inflation as inflation is too volatile
The % shows our money is losing value by that amount each year
Total cost of capital per annum/ total nominal value
Explain two ways in which the sales ledger control account can act as an aid to managing the business
Assists in the prep of final accounts , saving time, by identifying the total debtors.
Provides instant management information of total debtors, aiding the preparing of financial statements.
Explain how the sales ledger control account should be used to verify the balances in the sales ledger
The balance on the control account should agree with the totals of the individual accounts in the sales ledger.
If these don’t agree it indicates an error in either the sales ledger or the control account or both.
Many businesses sell good ok credit to their customers. Explain one reason why it is important for these businesses to make a provision for doubtful debts
Prudence concept
Anticipating the loss due to some trade receivables not meeting their future obligations. Prevent overstating profits. Prevent overstating the value of their assets
