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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
How long is an accounting period normally?
12 months
26
What is Accrual Accounting?
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
27
What is Matching? (Example page 11)
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
28
What is Prudence?
The exercise of caution when making judgements under conditions of uncertainty
29
Who is financial information provided for?
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 ```
30
Uses of financial information for Management (Directors)
Decision making Profitability Profit related bonus Forecasting based on results
31
Uses of financial information for suppliers
Bargaining power Trade payables (creditors) figure - will I be paid on time? Future prospects - continue to supply?
32
Uses of financial info for providers of finance
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)
33
Uses of financial info for customers
Ability to carry on delivering goods / services  Quality / Value for money Image / Ethics / CSR report
34
Uses of financial info for Gov and Gov agencies
Taxes - corporate / VAT Pensions Employment statistics
35
Uses of financial info for employees
Job security - long term prospects / growth Ability to pay bonus / salary rise / profitability
36
Uses of financial info for the general public
Considering investing Env issues Contribute to local economy
37
Monetary amounts - define
The amount that is essential when recording financial performance
38
Dual effect - define
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
39
Accrual accounting - define
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
40
Matching - define
Income earned and the related expenses incurred should be matched against each other within the periods in which those effects occur
41
Prudence - key point
Assets and income are not overstated Liabilities and expenses are not understated
42
Stages of preparing Financial Statements
Stage 1 - Recording Financial Data Stage 2 - Journal Entries Stage 3 - Nominal Ledger Stage 4 - Trial Balance Stage 5 - Financial Statements
43
What does the nominal ledger include?
All of the nominal accounts Each balance account or transaction account will have a nominal account e.g., Sales, Cash, Electricity
44
Every transaction involving financial info has what?
A dual effect
45
Equation for Capital
Capital (‘C’) = Assets (‘A’) - Liabilities (‘L’)
46
What is capital represented by? (Equation)
Capital Introduced (‘c’) + (Income (‘I’) - Expense (‘E’) - Drawings (‘D’)
47
Profit Equation
Income (‘I’) - Expense (‘E’)
48
Capital introduced definition
Capital introduced represents the assets (usually cash) that the owner has introduced to the entity
49
Drawings definition
Represents the assets (usually cash) that the owner has removed from the entity
50
Are income and expense cumulative for the life of an entity?
Yes
51
Summary equation of capital and capital introduced. (For table)
c + (I - E) - D = A - L
52
What must always be equal in this equation? (At the bottom of the table) - c + (I - E) - D = A - L
The left and right side
53
Debit definition
Defined as what is due
54
Credit definition
Something entrusted to another or a loan
55
Acronym DEAL what is it used for, what are the different elements
Used to represent debit elements of financial statements Drawings Expenses Assets Losses
56
Debit elements of financial statement are represent by what?
DEAL
57
Credit elements of financial statements are represented by what?
CLIP
58
What is used to show credit elements of a financial statement? What does it mean?
CLIP Capital Liabilities Income Profits
59
If elements of DEAL increase, what do you do?
Debit that account
60
If elements of DEAL decrease, what do you do?
Credit that account
61
If elements of CLIP increase what do you do?
Credit that account
62
If elements of CLIP decrease, what do you do?
Debit that account
63
DEAL Drawings a define
Assets (usually cash) removed from the entity by the owner
64
DEAL Expense
Decreases in assets or increases in liabilities
65
DEAL Assets
A present economic resource controlled by the entity
66
DEAL Losses
A loss is made when expenses exceeds income and when net assets decrease
67
CLIP Capital
Any financial assets a company has
68
CLIP Liabilities
A present obligation of the entity to transfer an economic resource
69
CLIP Income
Increases in assets or decreases in liabilities
70
CLIP Profits
A profit is made when income exceeds expense and when net assets increase
71
What is the process of preparation of journal entries
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
In journal entries - what is used to represent changes in cash?
Bank (represents bank account)
73
DEAL what is included in drawings?
Drawings
74
DEAL what is included in expenses?
Purchases
75
DEAL What is included in Assets?
Bank (cash) Trade debtors Equipment VAT account if owed something by HMRC PPE - cost
76
DEAL What is included in Losses
Losses Loss on disposal
77
CLIP What is included in Capital?
Capital Injected
78
CLIP What is included in liabilities?
Loan Trade creditors VAT account (Owe HMRC)
79
CLIP What is included in Income?
Sales
80
CLIP What is included in Profits?
Profits Gain on disposal
81
What are trade debtors?
Customers
82
Once a journal entry has been processed, where does it go?
It enters the nominal ledger
83
What is the nominal ledger sometimes called?
The general ledger
84
The nominal ledger includes?
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
What is used to produce the trial balance
Closing balances and cumulative amounts of each transaction type in each account at the end of year are the figures
86
Process of financial accounts
Nominal ledger (NL) -> Trial balance (TB) -> Financial Statements
87
What is the trial balance?
A period-end summary of balances and cumulative amounts of each transaction type within the nominal ledger
88
What does a trial balance identify
Debit balances and cumulative amounts of each transaction type separately from credit balances and cumulative amounts of each transaction type
89
Debits equal what in trial balances (in accordance with the dual effect and double-entry bookkeeping)
Credits
90
The amounts from the trial balance are used to what?
Prepare financial statements
91
Prior to the preparation of the balance sheet…
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
Where does the retained profit belong and why?
In the capital section It belongs to the owners of the entity
93
A profit and loss account is prepared…
For the period ended to present the financial performance of the entity
94
Profit and loss account example - page 39
Page 39
95
What is sales, cost of sales, gross profit in a P&L?
Trading profit
96
What is depreciation charge, wages and salaries, insurance in a P&L
Expenses
97
What is gain on disposal of plant and machinery?
Other income
98
Net profit definition
Profit after all expenses of the business have been taken into account (Profit for the Year)
99
When is a balance sheet prepared?
As at the period-end date to present the financial position of the entity Taken at a snapshot
100
Example of balance sheet - page 40
Page 40
101
What are trade debtors?
Customers
102
What is a trade creditor?
Suppliers

Financial Accounting (7 decks)

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