Lesson 1 - Introduction To Financial Accounting Flashcards
What is the public sector?
The part of the economy owned, financed and controlled by the State.
How many sectors is the UK economy made up of, and what are they?
Two - the public sector and the private sector.
What is the private sector?
The part of the economy where business activity is organised by private individuals operating on their own or in groups.
What types of business entities operate in the private sector?
- Sole traders
- Partnerships
- Limited companies
What is a sole trader?
A business entity owned by one person.
What is an unincorporated business?
One which in the eyes of the law there is no distinction between the business and the owner, who has unlimited liability.
What is unlimited liability?
Being personally responsible for all debts of the business, where private funds as well as those invested in the business are at stake.
What is a partnership?
A business entity owned by 2 or more people who carry on business together with the aim of making a profit.
Is a partnership incorporated or unincorporated?
Unincorporated, therefore the partners have unlimited liability.
In what circumstances can a partner limit their liability?
When the partner only invests funds in the business and is not allowed to be directly involved in the management of the business.
What can be used to set out the rights and responsibilities of partners?
A deed of partnership.
What is a deed of partnership sometimes referred to as?
A partnership agreement.
If no deed of partnership is drawn up, what governs the arrangement?
The Partnership Act 1890.
What does the Partnership Act 1890 state?
The profits or losses of a partnership are shared equally between partners irrespective of capital invested, hours worked or responsibilities.
Who owns limited companies?
Shareholders.
What does incorporated mean?
A company has its own legal identity separate from that of its owners. It can enter into contracts, sue and be sued in its own name.
How many types of limited company are there, and what are they called?
Two - private limited company and public limited company.
Which type of limited company can offer shares for sale to the public?
Public limited company.
How much authorised share capital must a public limited company have as a minimum?
£50,000.
What does limited liability mean?
Liability for the business’s debts is limited to the extent of an individual’s personal investment in the company.
What legislation regulates limited companies?
The Companies Act 2006.
What does the Companies Act 2006 govern?
- The formation and registration of a limited company
- Responsibilities of the company, it’s directors and company secretaries
- Requirements for financial record keeping and preparation and presentation of financial statements.
What is financial accounting?
Keeping financial records, and using information from financial records to prepare financial statements.
What types of business are required to keep financial records and prepare financial statements?
All types, no matter how large or small.
What is management accounting?
The process of internal accounting for the purpose of providing financial information at a time and in a format suitable for planning and controlling the business.
Management accounting is a legal requirement - true or false?
False.
What is the system of bookkeeping called where a spreadsheet is used to record receipts and payments?
Single entry system.
What type of bookkeeping system do medium and larger businesses use?
Double entry system.
What information is held by a bookkeeping system?
Assets Liabilities Claims (on assets by the owners, or equity by shareholders) Income Expenses
What does the mnemonic LACIE refer to?
The types of information held by a bookkeeping system: liabilities, assets, claims, income, expenses.
What types of source data support transactions?
Sales invoices/credit notes issued to customers
Purchase invoices/credit notes received from suppliers
Receipts issued or received, or till roll readings
Bills - utility companies
Vouchers - eg petty cash vouchers
Statements of account - eg bank statements
Chequebook stubs
What sources can be used to extract data to support transaction records?
Register of payments by standing order or direct debit
Payroll
The journal
How can financial records be kept safe and secure?
Not talking about financial information public ally
Only giving information to authorised people
Respecting client confidentiality
Locking information away
Using passwords
What law protects personal data?
The Data Protection Act says personal data should be kept safe and secure.
What types of filing system are there?
Alphabetical
Numerical
Chronological
Geographical
How long must source documents and records from which financial information is processed be kept?
Legal requirement is 6 years minimum.
What is accounting?
The use of financial information from a bookkeeping system to prepare financial statements on behalf of a business entity.
Name two financial statements.
Statement of profit or loss
Statement of financial position
