Module 1 - Fundamental Accounting Concepts Flashcards
What are accounting records? And what do they show?
The records of a business’ financial position
They show the businesses financial performance during that period
What is a businesses financial position?
What the business is owned vs owed
What is a businesses financial performance? And how is it normally shown?
How well a business has performed throughout the year
Normally shown via Profit or Loss
What are the legal forms in which a business may be set up?
Sole trader
Not-for-profit
Partnership
Limited company
What may a business be referred to as for financial accounting purposes?
The Reporting entity
Why must accounting records be maintained for a company
Tax purposes in accordance with HMRC
So you know what’s going on with the business
If you are a sole trader HMRC requires you to keep a record of:
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
What are debtors?
They are customers that owe money to the business (what you’re owed but have not yet received)
What are creditors? (Not trade creditors)
What a business has committed to spend but has not paid out yet
As well as standard records, further accounting records may be needed such as:
What is the Companies Act 2006?
Rules and regulations companies have to adhere to
What are financial statements?
Reports that provide information about the reporting entity’s financial position and financial performance
Elements of financial statements defined in the Conceptual Framework are?
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
Define assets
A present economic resource controlled by the entity as a result of past events
Define liabilities
A present obligation of the entity to transfer and economic resource as a result of past events
Equity (Capital)
Assets of the entity after deducting all its liabilities (i.e., it’s net assets)
Equation for Equity
Equation for Net assets
Assets - Liabilities
Define income
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)
What does Expenses include? (DEAL & CLIP)
Purchases
Depreciation charge
What is a reporting entity?
An entity that prepares financial statements
Sole trader:
The simplest structure for an entity
Involves an owner (the sole trader)
Running a business with OR without employees
E.g. plumber
A sole trader has what? What does this mean?
Unlimited personal liability
They are personal liable for the unpaid debts of the business
Is a sole trader a separate legal entity from the owner?
No
What is the dual effect?
It is a key accounting concept
Every transaction effects two things
Meal deal / car purchase examples
How long is an accounting period normally?
12 months
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
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
What is Prudence?
The exercise of caution when making judgements under conditions of uncertainty
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
Uses of financial information for Management (Directors)
Decision making
Profitability
Profit related bonus
Forecasting based on results
Uses of financial information for suppliers
Bargaining power
Trade payables (creditors) figure - will I be paid on time?
Future prospects - continue to supply?
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)
Uses of financial info for customers
Ability to carry on delivering goods / services 
Quality / Value for money
Image / Ethics / CSR report
Uses of financial info for Gov and Gov agencies
Taxes - corporate / VAT
Pensions
Employment statistics
Uses of financial info for employees
Job security - long term prospects / growth
Ability to pay bonus / salary rise / profitability
Uses of financial info for the general public
Considering investing
Env issues
Contribute to local economy
Monetary amounts - define
The amount that is essential when recording financial performance
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
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
Matching - define
Income earned and the related expenses incurred should be matched against each other within the periods in which those effects occur
Prudence - key point
Assets and income are not overstated
Liabilities and expenses are not understated
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
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
Every transaction involving financial info has what?
A dual effect
Equation for Capital
Capital (‘C’) = Assets (‘A’) - Liabilities (‘L’)
What is capital represented by? (Equation)
Capital Introduced (‘c’) + (Income (‘I’) - Expense (‘E’) - Drawings (‘D’)
Profit Equation
Income (‘I’) - Expense (‘E’)
Capital introduced definition
Capital introduced represents the assets (usually cash) that the owner has introduced to the entity
Drawings definition
Represents the assets (usually cash) that the owner has removed from the entity
Are income and expense cumulative for the life of an entity?
Yes
Summary equation of capital and capital introduced. (For table)
c + (I - E) - D = A - L
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
Debit definition
Defined as what is due
Credit definition
Something entrusted to another or a loan
Acronym DEAL what is it used for, what are the different elements
Used to represent debit elements of financial statements
Drawings
Expenses
Assets
Losses
Debit elements of financial statement are represent by what?
DEAL
Credit elements of financial statements are represented by what?
CLIP
What is used to show credit elements of a financial statement? What does it mean?
CLIP
Capital
Liabilities
Income
Profits
If elements of DEAL increase, what do you do?
Debit that account
If elements of DEAL decrease, what do you do?
Credit that account
If elements of CLIP increase what do you do?
Credit that account
If elements of CLIP decrease, what do you do?
Debit that account
DEAL
Drawings a define
Assets (usually cash) removed from the entity by the owner
DEAL
Expense
Decreases in assets or increases in liabilities
DEAL
Assets
A present economic resource controlled by the entity
DEAL
Losses
A loss is made when expenses exceeds income and when net assets decrease
CLIP
Capital
Any financial assets a company has
CLIP
Liabilities
A present obligation of the entity to transfer an economic resource
CLIP
Income
Increases in assets or decreases in liabilities
CLIP
Profits
A profit is made when income exceeds expense and when net assets increase
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
In journal entries - what is used to represent changes in cash?
Bank (represents bank account)
DEAL
what is included in drawings?
Drawings
DEAL
what is included in expenses?
Purchases
DEAL
What is included in Assets?
Bank (cash)
Trade debtors
Equipment
VAT account if owed something by HMRC
PPE - cost
DEAL
What is included in Losses
Losses
Loss on disposal
CLIP
What is included in Capital?
Capital Injected
CLIP
What is included in liabilities?
Loan
Trade creditors
VAT account (Owe HMRC)
CLIP
What is included in Income?
Sales
CLIP
What is included in Profits?
Profits
Gain on disposal
What are trade debtors?
Customers
Once a journal entry has been processed, where does it go?
It enters the nominal ledger
What is the nominal ledger sometimes called?
The general ledger
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
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
Process of financial accounts
Nominal ledger (NL) -> Trial balance (TB) -> Financial Statements
What is the trial balance?
A period-end summary of balances and cumulative amounts of each transaction type within the nominal ledger
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
Debits equal what in trial balances (in accordance with the dual effect and double-entry bookkeeping)
Credits
The amounts from the trial balance are used to what?
Prepare financial statements
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
Where does the retained profit belong and why?
In the capital section
It belongs to the owners of the entity
A profit and loss account is prepared…
For the period ended to present the financial performance of the entity
Profit and loss account example - page 39
Page 39
What is sales, cost of sales, gross profit in a P&L?
Trading profit
What is depreciation charge, wages and salaries, insurance in a P&L
Expenses
What is gain on disposal of plant and machinery?
Other income
Net profit definition
Profit after all expenses of the business have been taken into account (Profit for the Year)
When is a balance sheet prepared?
As at the period-end date to present the financial position of the entity
Taken at a snapshot
Example of balance sheet - page 40
Page 40
What are trade debtors?
Customers
What is a trade creditor?
Suppliers
