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Financial Accounting > Module 1 - Fundamental Accounting Concepts > Flashcards

Module 1 - Fundamental Accounting Concepts Flashcards

1
Q

What are accounting records? And what do they show?

A

The records of a business’ financial position

They show the businesses financial performance during that period

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2
Q

What is a businesses financial position?

A

What the business is owned vs owed

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3
Q

What is a businesses financial performance? And how is it normally shown?

A

How well a business has performed throughout the year

Normally shown via Profit or Loss

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4
Q

What are the legal forms in which a business may be set up?

A

Sole trader

Not-for-profit

Partnership

Limited company

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5
Q

What may a business be referred to as for financial accounting purposes?

A

The Reporting entity

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6
Q

Why must accounting records be maintained for a company

A

Tax purposes in accordance with HMRC

So you know what’s going on with the business

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7
Q

If you are a sole trader HMRC requires you to keep a record of:

A

All sales and income
All business expenses
VAT records if you’re registered for VAT
Income tax records if you employ people; and records about your personal income

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8
Q

What are debtors?

A

They are customers that owe money to the business (what you’re owed but have not yet received)

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9
Q

What are creditors? (Not trade creditors)

A

What a business has committed to spend but has not paid out yet

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10
Q

As well as standard records, further accounting records may be needed such as:

A
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11
Q

What is the Companies Act 2006?

A

Rules and regulations companies have to adhere to

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12
Q

What are financial statements?

A

Reports that provide information about the reporting entity’s financial position and financial performance

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13
Q

Elements of financial statements defined in the Conceptual Framework are?

A

Assets, liabilities and equity, which relate to a reporting entity’s financial position; and

Income and expenses, which relate to a reporting entity’s financial performance

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14
Q

Define assets

A

A present economic resource controlled by the entity as a result of past events

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15
Q

Define liabilities

A

A present obligation of the entity to transfer and economic resource as a result of past events

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16
Q

Equity (Capital)

A

Assets of the entity after deducting all its liabilities (i.e., it’s net assets)

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17
Q

Equation for Equity

Equation for Net assets

A

Assets - Liabilities

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18
Q

Define income

A

Increase in assets or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims (i.e., excluding capital introduced)

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19
Q

What does Expenses include? (DEAL & CLIP)

A

Purchases

Depreciation charge

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20
Q

What is a reporting entity?

A

An entity that prepares financial statements

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21
Q

Sole trader:

A

The simplest structure for an entity

Involves an owner (the sole trader)

Running a business with OR without employees

E.g. plumber

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22
Q

A sole trader has what? What does this mean?

A

Unlimited personal liability

They are personal liable for the unpaid debts of the business

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23
Q

Is a sole trader a separate legal entity from the owner?

A

No

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24
Q

What is the dual effect?

A

It is a key accounting concept

Every transaction effects two things

Meal deal / car purchase examples

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25
Q

How long is an accounting period normally?

A

12 months

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26
Q

What is Accrual Accounting?

A

A key accounting concept

It depicts the effects of transactions in the periods in which those effects occur. Even if the resulting cash receipts and payments occur in a different period

Simply - income / expenses are recorded as being earned / incurred when a transaction takes place and not necessarily at the point of issuing / receiving an invoice or receiving / paying cash

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27
Q

What is Matching? (Example page 11)

A

Key concept within Accrual Accounting

Income earned and the related expenses incurred should be matched against each other within the periods in which those effects occur

E.g., you pay for a phone to call people to make sales - the cost of that phone should be matched with the sales generated from that phone

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28
Q

What is Prudence?

A

The exercise of caution when making judgements under conditions of uncertainty

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29
Q

Who is financial information provided for?

A

A range of stakeholders:

Management
Owners of the business (shareholders)
Suppliers
Providers of finance to the business
Customers 
Government and government agencies
Employees
General public
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30
Q

Uses of financial information for Management (Directors)

A

Decision making

Profitability

Profit related bonus

Forecasting based on results

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31
Q

Uses of financial information for suppliers

A

Bargaining power

Trade payables (creditors) figure - will I be paid on time?

Future prospects - continue to supply?

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32
Q

Uses of financial info for providers of finance

A

Ability to repay - interest / capital / (are they in a healthy cash position)

Level of debts

Assets to secure loan against (a bank needs a guarantee on their loan)

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33
Q

Uses of financial info for customers

A

Ability to carry on delivering goods / services 

Quality / Value for money

Image / Ethics / CSR report

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34
Q

Uses of financial info for Gov and Gov agencies

A

Taxes - corporate / VAT

Pensions

Employment statistics

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35
Q

Uses of financial info for employees

A

Job security - long term prospects / growth

Ability to pay bonus / salary rise / profitability

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36
Q

Uses of financial info for the general public

A

Considering investing

Env issues

Contribute to local economy

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37
Q

Monetary amounts - define

A

The amount that is essential when recording financial performance

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38
Q

Dual effect - define

A

Every transaction involving financial info has a dual effect. The dual effect gives rise to the method of recording financial info known as double entry bookkeeping

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39
Q

Accrual accounting - define

A

Represents the effects of transactions in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period

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40
Q

Matching - define

A

Income earned and the related expenses incurred should be matched against each other within the periods in which those effects occur

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41
Q

Prudence - key point

A

Assets and income are not overstated

Liabilities and expenses are not understated

42
Q

Stages of preparing Financial Statements

A

Stage 1 - Recording Financial Data

Stage 2 - Journal Entries

Stage 3 - Nominal Ledger

Stage 4 - Trial Balance

Stage 5 - Financial Statements

43
Q

What does the nominal ledger include?

A

All of the nominal accounts

Each balance account or transaction account will have a nominal account e.g., Sales, Cash, Electricity

44
Q

Every transaction involving financial info has what?

A

A dual effect

45
Q

Equation for Capital

A

Capital (‘C’) = Assets (‘A’) - Liabilities (‘L’)

46
Q

What is capital represented by? (Equation)

A

Capital Introduced (‘c’) + (Income (‘I’) - Expense (‘E’) - Drawings (‘D’)

47
Q

Profit Equation

A

Income (‘I’) - Expense (‘E’)

48
Q

Capital introduced definition

A

Capital introduced represents the assets (usually cash) that the owner has introduced to the entity

49
Q

Drawings definition

A

Represents the assets (usually cash) that the owner has removed from the entity

50
Q

Are income and expense cumulative for the life of an entity?

A

Yes

51
Q

Summary equation of capital and capital introduced. (For table)

A

c + (I - E) - D = A - L

52
Q

What must always be equal in this equation? (At the bottom of the table) - c + (I - E) - D = A - L

A

The left and right side

53
Q

Debit definition

A

Defined as what is due

54
Q

Credit definition

A

Something entrusted to another or a loan

55
Q

Acronym DEAL what is it used for, what are the different elements

A

Used to represent debit elements of financial statements

Drawings
Expenses
Assets
Losses

56
Q

Debit elements of financial statement are represent by what?

A

DEAL

57
Q

Credit elements of financial statements are represented by what?

A

CLIP

58
Q

What is used to show credit elements of a financial statement? What does it mean?

A

CLIP

Capital
Liabilities
Income
Profits

59
Q

If elements of DEAL increase, what do you do?

A

Debit that account

60
Q

If elements of DEAL decrease, what do you do?

A

Credit that account

61
Q

If elements of CLIP increase what do you do?

A

Credit that account

62
Q

If elements of CLIP decrease, what do you do?

A

Debit that account

63
Q

DEAL

Drawings a define

A

Assets (usually cash) removed from the entity by the owner

64
Q

DEAL

Expense

A

Decreases in assets or increases in liabilities

65
Q

DEAL

Assets

A

A present economic resource controlled by the entity

66
Q

DEAL

Losses

A

A loss is made when expenses exceeds income and when net assets decrease

67
Q

CLIP

Capital

A

Any financial assets a company has

68
Q

CLIP

Liabilities

A

A present obligation of the entity to transfer an economic resource

69
Q

CLIP

Income

A

Increases in assets or decreases in liabilities

70
Q

CLIP

Profits

A

A profit is made when income exceeds expense and when net assets increase

71
Q

What is the process of preparation of journal entries

A

The dual effect:

1a - What two accounts are effected?
1b - What types of Accounts are they? (elements)

DEAL and CLIP

2a - is it an increase or decrease
2b - DEAL or CLIP - Dr or Cr

Journal Entry

72
Q

In journal entries - what is used to represent changes in cash?

A

Bank (represents bank account)

73
Q

DEAL

what is included in drawings?

A

Drawings

74
Q

DEAL

what is included in expenses?

A

Purchases

75
Q

DEAL

What is included in Assets?

A

Bank (cash)

Trade debtors

Equipment

VAT account if owed something by HMRC

PPE - cost

76
Q

DEAL

What is included in Losses

A

Losses

Loss on disposal

77
Q

CLIP

What is included in Capital?

A

Capital Injected

78
Q

CLIP

What is included in liabilities?

A

Loan

Trade creditors

VAT account (Owe HMRC)

79
Q

CLIP

What is included in Income?

A

Sales

80
Q

CLIP

What is included in Profits?

A

Profits

Gain on disposal

81
Q

What are trade debtors?

A

Customers

82
Q

Once a journal entry has been processed, where does it go?

A

It enters the nominal ledger

83
Q

What is the nominal ledger sometimes called?

A

The general ledger

84
Q

The nominal ledger includes?

A

All transaction and adjustments that the entity has made which impact the accounts included within the entity’s chart of accounts

It shows every transaction which has affected the assets, liabilities, capital, income and expenses of the entity

85
Q

What is used to produce the trial balance

A

Closing balances and cumulative amounts of each transaction type in each account at the end of year are the figures

86
Q

Process of financial accounts

A

Nominal ledger (NL) -> Trial balance (TB) -> Financial Statements

87
Q

What is the trial balance?

A

A period-end summary of balances and cumulative amounts of each transaction type within the nominal ledger

88
Q

What does a trial balance identify

A

Debit balances and cumulative amounts of each transaction type separately from credit balances and cumulative amounts of each transaction type

89
Q

Debits equal what in trial balances (in accordance with the dual effect and double-entry bookkeeping)

A

Credits

90
Q

The amounts from the trial balance are used to what?

A

Prepare financial statements

91
Q

Prior to the preparation of the balance sheet…

A

The profit and loss related accounts in the nominal ledger must be closed and the total profit or loss for the period transferred into retained profits

92
Q

Where does the retained profit belong and why?

A

In the capital section

It belongs to the owners of the entity

93
Q

A profit and loss account is prepared…

A

For the period ended to present the financial performance of the entity

94
Q

Profit and loss account example - page 39

A

Page 39

95
Q

What is sales, cost of sales, gross profit in a P&L?

A

Trading profit

96
Q

What is depreciation charge, wages and salaries, insurance in a P&L

A

Expenses

97
Q

What is gain on disposal of plant and machinery?

A

Other income

98
Q

Net profit definition

A

Profit after all expenses of the business have been taken into account (Profit for the Year)

99
Q

When is a balance sheet prepared?

A

As at the period-end date to present the financial position of the entity

Taken at a snapshot

100
Q

Example of balance sheet - page 40

A

Page 40

101
Q

What are trade debtors?

A

Customers

102
Q

What is a trade creditor?

A

Suppliers

Financial Accounting (7 decks)

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