Pre-Course Workbook Flashcards
What will all businesses produce?
- A Statement of Profit or Loss
- A Statement of Financial Position periodically (usually annually)
What are the two basic questions which an investor in a business should ask?
- Is this business making a profit?
- Has the business got enough funds to pay its debts?
What is bookkeeping?
The recording of a business’s commercial transactions
What is the purpose of bookkeeping?
To summarise the commercial transactions of a business so that accounts can be produced
What is a sole trader?
A sole trader is usually a small business, such as a plumber or plasterer, which is
owned and managed by the same person.
The sole trader is legally responsible for all of the losses that their business makes.
Sole traders produce accounts which are not heavily regulated. The sole trader will
usually employ a firm of accountants to prepare the business’s accounts.
What is a partnership? Give two examples
This is a business owned and managed by two or more people.
Examples of such
are Accountancy and Law firms. Each Partner in this business is a sole trader for
accounting purposes and a Partnership is a collection of sole traders acting together
in one business. This means the partners are jointly and severally liable for any
losses that their business makes.
Partnerships produce special Partnership accounts.
What is a Company? Who are they regulated by?
A company is not always owned by the managers of the business (the directors) but
instead is often owned by Shareholders who buy shares in the company and who
elect the Directors to run the company.
A company has limited liability which means that, unlike a sole trader, the owners
(i.e. the shareholders) are not responsible for the losses of the company. The
company is its own legal entity.
Companies must produce company accounts and these are heavily regulated by
Company Law and Accounting Standards.
What is SOFP?
the Statement of Financial Position
What are Assets?
What the business OWNS or CONTROLS
What are Liabilities?
What the business OWES
What can Assets be broken down into?
- Non-current assets
- Current assets
What are Non-Current Assets? Give some examples
- ‘Assets acquired for use within a business over more than one year (usually several years) with a view to earning profit but not for immediate resale”
- Land, buildings, plant and machinery, patents, motor vehicles, tools, fixtures and fittings, office equipment, computers, long-term investments ships, works of art, locomotives
What is a Current Asset? How are these essential to business? Give some examples.
- Assets acquired for conversion into cash in the ordinary course of business - usually expected to be converted into cash within 12 months
- A business cannot exist without the constant movement of current assets
- Inventories (goods held for resale)
- Cash - positive bank balances and physical cash balances
- Receivables (when we sell goods to our customers on credit)
What is a receivable?
When goods are sold to customers on credit - they pay us later. When our customer pays us will depend on the credit terms we offer them but it will usually be within 1-3 months
What is a Non-Current Liability? What is the most common example?
These are amounts owed by the business, payable in more than one year after the date of
the statement of financial position. Long-term bank loans are the most common example.
What is a Current Liability? Give two examples.
A current liability is simply a short-term liability i.e. an amount owed by the business, payable
within 12 months.
Trade payables - these occur when we buy goods on credit and owe our supplier
money. When we will pay our supplier depends on how long they give us but this will
usually be within 1 – 3 months.
Bank overdraft – negative balances on bank accounts, meaning we owe the bank the
money back.
What is the Business Entity Concept?
However, from an accounting perspective, the Owner and the Manager are two separate entities. Therefore if the business owner puts anything into
the business, the business OWES this back to the owner.
What does the term ‘capital’ represent?
The term ‘capital’ represents the total amount which the business owes to its owner, or
proprietor. On our SOFP we need to show at that particular date how much capital there
is in the business.
What is ‘Opening Capital’?
Opening capital is the amount which the proprietor has invested in the business at the start of the year.
What is a ‘Capital Injection’?
The money the proprietor puts into the business during the year
What are ‘drawings’?
Drawings are any amounts taken out of the business by the business owner e.g. the sole
trader takes £1,000 per month out of the business as his/her salary.
What is the Accounting Equation?
Total Assets = Capital + Total Liabilities
How do we calculate capital?
Opening capital + capital injections + profit - drawings
What does an SOFP determine?
Whether a business has made a profit (more sales than expenses) or a loss (more expenses than sales)
