Preparing and interpreting accounting reports Flashcards
Process of balancing ledger accounts
- Footing
- Balancing
- Closing
Footing
Determining the balance of a ledger account
Used for all ledger accounts, shows final balance of debits and credits
Generally used in the middle of a reporting period and whenever a pre-adjustment trial balance needs to be prepared
Balancing
Determining the balance of an asset, liability and owner’s equity ledger account
Only completed at the end of a period
Formal process to determine balance of accounts so BS can be prepared
Closing
Process of resetting revenue and expense accounts to 0 in order to calculate net profit for the period
Only closed at the end of the period
Allows for accurate calculation of net profit for reporting period
Process of closing revenue and expense accounts
- Revenue (DR entry) accounts closed to the P+L summary (CR entry)
- Expense (CR entry) accounts closed to the P+L summary (DR entry)
- Profit or loss is transferred to the capital account
- Drawings account is closed off (transferred) to the capital account
Purpose of closing/balancing accounts
- Ensures accurate calculation of net profit
- Aids prep for IS and BS
- Ensures accounts are ready for next period
- Upholds relevance as all info important for decision-making is included
- Upholds period assumption as all reports are within reporting period
Profit and loss summary
Account to which revenue and expense accounts are transferred to in order to determine net profit/loss
- Temporary owner’s equity account
- Allows for accurate calculation of net profit
Drawings
Withdrawing of cash or other assets from the business by the owner(s)
Once profit/loss has been transferred to the capital account, the last step is to transfer any drawings taken by the owner to the capital account
- Ensures business’s owner’s equity reflects all transactions between owner and business
- Upholds entity and period assumptions
Cash flow statement
Accounting report which summarises all cash inflows and outflows into a final bank balance for a reporting period
- Prepared at the end of the reporting period and assesses firm’s ability to manage cash
Cash flow statement structure
- Operating activities
Relate to firm’s day-to-day trading activities - Investing activities
Non-current assets - Financing activities
Relate to any changes in firm’s financial structure
- Capital, drawings, loans, loan repayments
Bank balance at end = inflows - outflows + bank balance at start
Income statement
Accounting report which determines net profit/loss by deducting expense from revenues
- Assesses firm’s ability to make a profit and control its expenses
Income statement structure
Revenues
- Sales, sales returns
Less cost of goods sold
- Cost of sales, delivery/cartage/freight in, import duties, buying expenses
Gross profit
= Revenues - cost of goods sold
Adjusted gross profit
= Gross profit + inventory gain or less inventory loss and/or inventory write-down
- Assesses businesses ability to manage its inventory
Add other revenues
- Discount revenue, interest revenue, profit on disposal
Less other expenses
- Wages, rent, depreciation, discount, interest, loss on disposal, bad debts
= Net profit
Assessing the income statement
Gross profit
- Determines the amount left over to cover other expenses
Net profit
- Indicates a businesses ability to maintain revenue and control expenses
Net loss
- Indicates that the business has struggled to generate revenue from sales or struggled to control its expenses
Balance sheet
Accounting report that lists all of a business’ assets, liabilities and owner’s equity
Potential balance sheet accounts
Current assets
- Cash at bank, accounts receivable, inventory, prepaid expenses, accrued revenue
Non-current assets
- Vehicles, computers, equipment, buildings/premises, fittings
Liabilities
- Bank overdraft, accounts payable, loan, accrued expenses, unearned revenue
Non-current liabilities
- Loan, mortgage
Owners equity
- Capital, drawings, net profit
