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Personal and Business Finance > Learning Outcome C: Understand the purpose of accounting > Flashcards

Learning Outcome C: Understand the purpose of accounting Flashcards

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1
Q

It is impossible to truly understand how a business operates without some knowledge of the __________ process

A

accounting

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2
Q

Anyone who wants to understand how well a business is performing - such as the owner, an employee or a potential investor - is likely to turn where?

A

Straight to its accounts

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3
Q

However good a business idea may be, if the owner doesn’t keep a careful eye on what means the business is almost certain to fail?

A

Its accounts

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4
Q

Accounting involves the recording of _________ ____________

A

financial transactions

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5
Q

Financial transactions

A

Actions by a business that involve money either going into or out of a business - for example, making a sale or paying a bill

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6
Q

HM Revenue & Customs (HMRC)

A

HM is an abbreviation for Her (or His) Majesty’s, and the HMRC is a British government department responsible for the collection of all types of taxes

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7
Q

True/False: Accounting involves only past financial transactions

A

False, it can involve planned ones too

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8
Q

Accounting involves the recording of financial transactions, planned or actual, and the use of these figures to produce what?

A

Financial information

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9
Q

Keeping business records accurate and up to date is important for the ______ _______ of a business

A

smooth running

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10
Q

Who must record all of the money coming into a business (from sales) and all of the money going out, such as expenses?

A

The business owner or a bookkeeper

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11
Q

What can happen if a business fails to record its income and outgoings?

A

It may find itself not chasing payments, forgetting to pay bills or, even more seriously, in trouble with HMRC

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12
Q

If a business doesn’t record its transactions correctly, what could happen?

A

It cannot report its financial performance accurately and therefore tax payments may be wrong

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13
Q

What is a manager of a business responsible for?

A

The planning, monitoring and controlling of the resources for which they are responsible.

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14
Q

What is the benefit of having a manager who clearly understands a business’s accounts?

A

They will be better able to make informed decisions and plan for the future

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15
Q

Management of a business involves careful coordination of resources including… (name 2)

A

staff, materials, stock, money, etc.

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16
Q

What must a business manager ensure there are sufficient funds to do?

A

Any from pay wages, order new stock, pay bills and meet other demands for cash outflows by balancing this with the money coming in from sales

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17
Q

Financial reporting is governed by…

A

laws and regulations

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18
Q

Why is financial reporting governed by laws and regulations?

A

To ensure that any financial records give a fair and accurate picture of the business

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19
Q

Why is it important that businesses comply with financial reporting laws and regulations?

A

To avoid getting in trouble with HMRC as well as ensure that investors and other stakeholders are not misinformed. Compliance will also help protect against fraud

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20
Q

True/False: Compliance to financial reporting laws and regulations will help protect against fraud

A

True

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21
Q

Fraud

A

When an individual acquires company money for personal gain, through illegal actions

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22
Q

Profit

A

Surplus achieved when total revenue (income) from sales is higher than the total costs of a business

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23
Q

Loss

A

Shortfall suffered when total revenue from sales is lower than the total costs of a business

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24
Q

Gross profit

A

Sales revenue minus cost of goods sold (the cost of the actual materials used to produce the quantity of goods sold)

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25
Q

Sales revenue

A

Quantity sold multiplied by the selling price

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26
Q

Net profit

A

Gross profit minus other expenses, for example, rent and advertising

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27
Q

Without financial records it would be impossible to know if a business was making a ______ or a ____

A

profit or a loss

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28
Q

Without financial records it would be impossible to know whether or not a business was owed money or…

A

was in debt to others

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29
Q

Give 3 examples of KPIs of financial performance

A

Any 3 from gross profit, net profit, value owed to the business and value owed by the business

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30
Q

What does accounting control?

A

The flow of money into and out of a business

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31
Q

How does accounting control the flow of money into and out of a business?

A

By maintaining accurate records and monitoring performance

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32
Q

What does monitoring performance mean about unusual activity in accounting?

A

Any unusual activity is spotted, helping to prevent fraud

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33
Q

Trade receivales

A

Money owed to the business from sales made but not yet paid for

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34
Q

Trade payables

A

Money the business owes from supplies purchased but not yet paid for

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35
Q

What does keeping track of trade receivables and trade payables ensure for a business?

A

Ensures the business can meet its day-to-day expenses

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36
Q

If trade receivables and payables are not carefully controlled, there is danger that…

A

the business may not be able to survive

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37
Q

What does credit control aim to ensure?

A

That all money owed to a business is paid on time

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38
Q

Name the 2 categories of income

A

Capital income and revenue income

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39
Q

Fixed assets

A

Items of value owned by a business that are likely to stay in the business for more than one year - for example, machinery. Also known as non-current assets

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40
Q

What are fixed assets also known as?

A

Non-current assets

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41
Q

Capital income

A

Money invested by the owners or other investors that is used to set up a business or buy additional equipment

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42
Q

What does capital income tend to be used for?

A

To buy things that will stay in the business for a medium-to-long period of time - for example, premises, vehicles or equipment

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43
Q

Capital income tends to be used to buy things that will stay in the business for a medium-to-long period of time - for example, premises, vehicles or equipment. What are these called?

A

Fixed assets

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44
Q

When setting up a business what may capital income be used for?

A

To buy opening stock, premises, vehicles, equipment, etc.

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45
Q

As a business develops, what should stock be paid for by?

A

Sales income

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46
Q

What are the sources of capital income available to business owners influenced by?

A

The type of business

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47
Q

A loan is an amount of money lent to the business or business owner(s) from…

A

a bank or other financial institution

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48
Q

A loan is a ____ ___ that then has to be paid back at a set amount per month over the period of the loan

A

lump sum

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49
Q

A loan in a lump sum that then has to be paid back how?

A

At a set amount per month over the period of the loan

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50
Q

How long is the typical period of a loan

A

Five years

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51
Q

True/False: Longer-term loans over 5 years can be agreed

A

True

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52
Q

What is added in addition to the repayment of a loan?

A

A monthly interest repayment

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53
Q

Interest on a loan is…

A

the amount of money the bank is charging for the loan as a percentage of the amount borrowed

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54
Q

Interest rates can be _____ or…

A

fixed, or it may vary with changes in the economy

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55
Q

What makes a loan a relatively expensive source of capital income?

A

The interest payable on top of the loan

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56
Q

True/False: Monthly loan payments have to be made even if the business is not making a profit

A

True

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57
Q

Banks are not guaranteed to lend money to a business, so the business would have to…

A

justify how the money borrowed would be spent and, more importantly, how they can afford to repay it

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58
Q

True/False: Often bank loans have to be secured against an asset

A

True

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59
Q

Why do bank loans often have to be secured against an asset?

A

To convince the bank that the risk being taken is not too geat

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60
Q

Give an example of an asset in which a bank loan may be secured against

A

Any from the entrepreneur’s home, the company’s vehicles, etc.

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61
Q

If a loan has an asset secured against it, what will happen if a business fails to meet payments?

A

The bank can claim the asset

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62
Q

Asset

A

Any item of value owned by an individual or firm

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63
Q

What’s the difference between a mortgage and a bank loan?

A

Mortgages tend to be for a larger sum of money and over a longer period of time

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64
Q

What period of time to mortgages tend to be over?

A

Typically 25 years

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65
Q

True/False: Mortgages are always secured on an asset

A

True

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66
Q

Mortgages are always secured on an asset, normally…

A

property

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67
Q

Individuals will take out a ________ to buy a house

A

mortgage

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68
Q

What may businesses take out to buy their premises, for example a factory, retail store or warehouse?

A

A mortgage

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69
Q

When does a business become a company?

A

When it is registered with Companies House and issues shares to its shareholders

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70
Q

True/False: Shareholders are owners of a business and all contribute towards the capital income

A

True

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71
Q

Shareholders normally receive a ______ right

A

voting

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72
Q

The more shares a shareholder owns, the greater…

A

their ability to influence decision making

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73
Q

How are shareholders rewarded for their investment?

A

By the payment of a dividend; this is a share of the profits

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74
Q

Dividend

A

Share of a business’ profits

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75
Q

Owner’s capital

A

Money invested in a business from the owner’s personal savings

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76
Q

Sole trader

A

A person who owns a business on their own

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77
Q

How does a sole trader have to find their capital income?

A

From their own sources or personal loans

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78
Q

What do sole traders often do with their personal savings?

A

Invest them into the business

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79
Q

What may a sole trader use to secure a loan?

A

Personal assets such as their house

80
Q

Why are investments of owner’s capital a big risk for sole traders?

A

They are ultimately responsible for the debts of the business

81
Q

Being a sole trader can limit the amount of money available and can therefore…

A

restrict the size of the business

82
Q

What’s the benefit of having a successful business as a sole trader?

A

You can keep all of the profits for yourself

83
Q

Partnership

A

When two or more people join together to set up a business as partners

84
Q

In a partnership, who is expected to contribute towards the capital income?

A

Each partner

85
Q

In a partnership, each partner would be expected to contribute towards the capital income, so increasing the…

A

potential amount of money available

86
Q

Give 2 examples of things that partners share in business

A

Decision making and profit, etc.

87
Q

In most partnerships, any loans taken out are secured by…

A

the partners’ own assets

88
Q

Why is a partnership a high-risk option in business?

A

Any loans taken out are usually secured by the partners’ own assets

89
Q

True/False: Debentures are short-term sources of capital income

A

False, they are medium- to long-term

90
Q

Large companies often use debentures to secure what?

A

Income

91
Q

True/False: Interest on a debenture is normally at a fixed rate

A

Tre

92
Q

How is debenture repaid?

A

As a lump sum, normally on a pre-agreed date

93
Q

True/False: Debentures can be secured against an asset

A

True

94
Q

Debentures are a form of what?

A

Loan capital

95
Q

Capital income

A

Money invested in the business to set it up or later buy additional assets; it is a long-term investment

96
Q

Revenue income

A

Money that comes into the business from performing its day-to-day- function - selling goods or providing a service

97
Q

Money earned from selling goods or providing a service is an example of which type of income?

A

Revenue income

98
Q

What does the nature of revenue income depend on?

A

The activities that the business does to bring in money

99
Q

Sales turnover

A

Money coming in from the sales of goods or services

100
Q

What is sales turnover determined by?

A

The prices charged and the number of customers

101
Q

What are the two types of sales?

A

Cash sales and credit sales

102
Q

What is meant by cash sales?

A

The customer pays there and then

103
Q

What is meant by credit sales?

A

The customer buys but then pays at a later date

104
Q

Commission

A

A fee paid to a salesperson in exchange for services in facilitating or completing a sales transaction. Commission could be a flat fee or a percentage of the revenue, gross margin or profit generated by the sale. It could also be charged by brokers to assist in the sake of security, properties, etc.

105
Q

Give 2 examples of how commission could be determined

A

Any 2 from a flat fee, a percentage of the revenue, gross margin or profit generated by the sale.

106
Q

Commission could be charged by brokers to…

A

assist in the sale of security, properties, etc.

107
Q

A business that owns property and charges others for use of all or part of that property will receive what as their main source of income?

A

Rent

108
Q

If a business owns a house and rents out three rooms, what will it receive?

A

Rent frm each of these renters

109
Q

A business may sell products or services as an agent of another business. They sell another business’ products on their behalf and, for each sale they make, they get paid a percentage on that sale. What is this percentage called?

A

Commission

110
Q

Interest received

A

Money earned on savings or lending

111
Q

If a business has a positive bank balance what will they receive on this?

A

Interest

112
Q

If a business has a positive bank balance it will receive ________ on this. This acts as revenue coming into the business.

A

interest

113
Q

A business may lend money to another person or business. What will be charged to the lender?

A

Interest

114
Q

A business may lend money to another person or business. Interest will be charged to the lender and the business lending the money will receive interest as a form of what?

A

Revenue

115
Q

Discount received

A

When a business is given a percentage off a sale, normally in return for quick payment or a bulk order. This reduces the costs to the business

116
Q

Expenditure

A

Money spent by a business

117
Q

Name the two types of expenditure

A

Capital expenditure and revenue expenditure

118
Q

What is capital expenditure used to buy?

A

Capital items

119
Q

Capital items

A

Assets bought from capital expenditure such as machinery and vehicles that will stay in a business for more than a year

120
Q

Capital items are current/non-current assets

A

non-current assets

121
Q

Capital items are tangible/intangible assets

A

intangible

122
Q

Statement of financial position

A

A financial document that shows the net worth of a business by balancing its assets against its liabilities. It is often called a balance sheet

123
Q

Non-current assets

A

Items owned by a business that will remain in the business for a reasonable period of time

124
Q

What is a statement of financial position often also called?

A

Balance sheet

125
Q

True/False: Non-current assets are shown on a business’s statement of financial position/balance sheet

A

True

126
Q

Give an example of a non-current asset

A

Any from land, premises, machinery, equipment, vehicles, fixtures, fittings, etc.

127
Q

What are non-current assets sometimes referred to as, and why?

A

‘Tangible assets’, because they can be touched

128
Q

Most fixed assets increase/lose their value over time

A

lose

129
Q

Most fixed assets lose value over time and for this reason they are what?

A

Depreciated

130
Q

Depreciated

A

Each year their value on the balance sheet is reduced in order to give a fair value of the asset

131
Q

Intangible asset

A

Something owned by the business that cannot be touched but adds value to the business

132
Q

Goodwill

A

When you buy an existing business, its name and reputation will already be known, and it may already have an established customer base or set of clients

133
Q

What is the benefit of having a business with goodwill?

A

Its name and reputation will already be known and it may already have an established customer base or set of clients - increasing thex business’ value and selling price

134
Q

What is added to the value of a business to reflect the value of its goodwill?

A

A sum of money

135
Q

What’s the limitation of adding a sum of money to the value of a business to reflect its goodwill?

A

It is difficult to place a figure on

136
Q

Patent

A

The legal protection of an invention, such as a unique feature of a product or a new process

137
Q

Wy may an entrepreneur or business patent their idea?

A

To stop others from copying the idea

138
Q

What does having a patent allow a business to do?

A

Exploit this in the future by launching an innovative product at a premium selling price

139
Q

True/False: It is easy to know how much value to place on a patent

A

False, it is difficult to know how much value to place on it

140
Q

Trademark

A

A symbol, logo, brand name, words or even a colour that sets apart one business’ goods or services from those of its competitors

141
Q

Trademarks can be a key influence on ________ ______ and build a strong _____ _______

A

consumer choice, brand loyalty

142
Q

A trademark is recored as a tangible/an intangible asset

A

an intangible asset

143
Q

Brand name

A

A feature of a business that is recognised by customers and distinguishes the business from competitors

144
Q

What will customers link a brand name with?

A

Expectations based on previous experiences with the brand

145
Q

It is sometimes said that a brand name is a promise of…

A

what to expect

146
Q

Revenue expenditure

A

Spending on items on a day-to-day or regular basis

147
Q

What are the expenses incurred by a business that are shown on the profit and loss account?

A

Revenue expenditure

148
Q

True/False: Revenue expenditure is fixed between all businesses

A

False, the types of costs incurred vary from business to business

149
Q

Most businesses providing a good or service will require some sort of _________, whether it is raw materials, finished goods to sell on or supplies to provide the service

A

inventory

150
Q

When a business is first set up, it is likely to have to buy inventory with cash. Why?

A

It will not have built a reputation as being trustworthy and able to pay

151
Q

A business becomes more established, it may be able to buy inventory on ______

A

credit

152
Q

Receiving an inventory and paying 30 days later is an example of buying an inventory on what?

A

Credit

153
Q

Why may bigger and more established businesses also be able to drive down the cost of inventory?

A

They will buy in larger quantities

154
Q

Give an example of costs other than the goods themselves that are related to inventory

A

Any from storage costs and insurance

155
Q

Rent

A

The cost of using premises not owned by the business. These are regular payments, usually monthly, for the use of premises

156
Q

Rent payments are usually how regular?

A

Monthly

157
Q

In the same way as private residents pay council tax to the local authority, businesses pay what?

A

Non-domestic rates

158
Q

Non-domestic rates

A

This is a sum of money paid to the local council to go towards services such as street lights and refuse collection

159
Q

True/False: Non-domestic rates are a set amount

A

False, they are not

160
Q

Who are non-domestic rates calculated by?

A

The council

161
Q

What are non-domestic rates calculated based on?

A

The size and location of the premises and the nature of the business

162
Q

How regularly will a business receive bills for services such as gas and electricity?

A

Often quarterly (every 4 months)

163
Q

True/False: Water can be a fixed rate or based upon usage

A

True

164
Q

How can water bills be based upon usage?

A

If a water meter is fitted

165
Q

A business is legally required to take out a number of types of _________ to protect itself from the possibility of serious losses

A

insurance

166
Q

Name 2 types of insurance that a business is legally required to take out

A

Any 2 from buildings insurance, contents insurance, public liability insurance and employers’ liability insurance

167
Q

Buildings insurance

A

To protect the physical building from damage that may be caused by events such as fire

168
Q

Contents insurance

A

Protects what is inside the building in terms of machinery, fixtures and fittings and stock from damage that may be caused by events such as flooding

169
Q

Public liability insurance

A

To protect people within the building who may be harmed or injured from an event such as an accident

170
Q

Employers’ liability insurance

A

This means that if the employee is injured at work, the business is protected against any claims for compensation or any legal costs incurred

171
Q

What does administration refer to?

A

The paperwork that goes on within a business either internally between employees or externally with suppliers and customers

172
Q

Give 2 examples of items included in administrative costs

A

Any 2 from postage, printing and stationary

173
Q

Business cards, headed paper and order books are examples of which types of costs?

A

Administrative costs

174
Q

What type of cost are telephone charges classed as?

A

Administrative costs

175
Q

Why are telephone charges slightly unusual administrative costs from an accounting point of view?

A

For a landline, these costs are split into two: the line rental cost, which is paid quarterly in advance, and then the call charges, which are paid quarterly after use

176
Q

Salary

A

An annual figure paid to an employee divided into equal monthly payments

177
Q

A trainee accountant may have a salary of £18,000 per year. What would their gross pay per month be?

A

£1,500

178
Q

A trainee accountant may have a salary of £18,000 per year, meaning their gross pay per month would be £1.5k. What would they have to pay before taking home the rest of their pay?

A

National Insurance, tax and maybe pension contributions

179
Q

True/False: If someone’s salary is £18,000, the business’ outgoings are £18,000

A

False, the amount the business have to pay is higher. The business also has to pay employers’ National Insurance

180
Q

How much is employer’s National Insurance?

A

12.8%

181
Q

Wages

A

An hourly rate paid to an employee, meaning there is a direct link between the number of hours worked and the amount of money paid

182
Q

What’s the benefit of paying a wage rather than a salary?

A

Allows greater flexibility for both the employer and the employee

183
Q

What’s the main drawback of paying a wage rather than a salary?

A

It creates greater uncertainty

184
Q

Give 3 examples of marketing costs

A

Any from advertisements, promotional literature, promotional events, point of sale materials and so on

185
Q

True/False: Personal banking is generally free

A

True

186
Q

True/False: Banks charge businesses for each transaction that takes place

A

True

187
Q

Why may banks offer free banking to businesses for the first year?

A

As a marketing technique

188
Q

If a business has a bank loan or mortgage, what will be charged on this?

A

Interest

189
Q

Why may banks offer big businesses preferential interest rates?

A

If they are confident that the money will be paid back and if they want to keep that particular business as a loyal customer

190
Q

True/False: Assets increase in value over time

A

False, they lose value over time

191
Q

Accountants use ____________ to spread out the cost of an asset over its useful life

A

depreciation

192
Q

Depreciation is a paper exercise to…

A

match the cost of an asset against the time it is used within a business

193
Q

True/False: A machine purchased at a cost of £50,000 that is expected to last five years would be shown as a one-off expense at the time of purchase in the accounts

A

False, it would be shown as an expense of £10,000 per year

194
Q

Straight-line depreciation

A

An asset is depreciated by a set amount each year

195
Q

Reducing balance depreciation

A

An asset is depreciated by a set percentage of its remaining value each year

196
Q

Why are reductions offered to customers an expense to a business?

A

It reduces the amount of cash flowing into the business

197
Q

Give 2 reasons why discounts may be allowed in business

A

Any 2 from to attract customers, for bulk purchases and to gain a competitive advantage

Personal and Business Finance (6 decks)

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