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Y1 - Financial Accounting > Semester 1 Exam > Flashcards

Semester 1 Exam Flashcards

1
Q

What is accounting?

A

The process of identifying, measuring and communicating financial information about a business entity

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2
Q

3 types of business entity

A
  • Sole trader = a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses.
  • Company
  • Partnership
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3
Q

Matching

To calculate financial performance in a period…

A

To calculate financial performance in a period, all income due must be matched with all expense incurred to generate the income

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4
Q

The financial statement which shows ___________ ___________ over a ________ of _____ is called an ________ _____________ or ________ and _____ account

A

The financial statement which shows financial performance over a period of time is called an Income Statement or Profit and loss account

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5
Q

Gross profit equation

A

Gross profit = sales revenue - purchase cost

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6
Q

Net profit equation

A

Net profit = Sales revenue - total cost

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7
Q

Income Statement

A

Summarises all income and expenditure over a period of time (usually 12 months)

= Its purpose is to show amount of
profit (where income > expenses) or
loss (where income < expenses)

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8
Q

Title Convention examples

A

“for the year ending 2023”
“Balance sheet as at November 25 2023”

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9
Q

What do brackets mean?

A

Means a minus

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10
Q

Income Statement can also be known as (2)

A
  • Trading and profit and loss account or
  • Profit and loss account
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11
Q

Financial Position of the Business

A
  • Cash?
  • Amounts owed to him?
  • Amounts owed by him?
  • Profit or loss?
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12
Q

Separate Entity Concept

A

The activities of the business should be kept separate from the owner’s business

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13
Q

Separate Entity Concept - why?

A
  • To understand how the business is operating in its own right
  • The Government - HMRC
  • Customers
  • Finance providers - Banks, Venture capitalists
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14
Q

Balance Sheet

A

The financial statement which shows financial position at a specific point in time

A snapshot of assets, liabilities and capital at a single moment

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15
Q

The Accounting Equation

A

Assets = Liabilities+ Capital

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16
Q

Asset definition

A

Resources owned/controlled by the business to give future economic benefit
- Cash in bank, stock, machinery

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17
Q

Liability

A

What the business owes to third parties (debts, obligations)
- Bank overdraft, money owed to supplier

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18
Q

Capital (owed to the owner/s)

A
  • Investment by the owner
  • Money introduced, retained profit
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19
Q

If a sole trader pays himself a wage it is called ________ and it will count as ________ but if it is a company then it is an _________

A

If a sole trader pays himself a wage it is called drawings and it will count as capital but if it is a company then it is an expense

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20
Q

What are non-current assets and current assets?

A

Non-current assets = things that bring income in more than 12 months

Current assets = things that bring income in less than 12 months

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21
Q

Income/ Revenue/ Turnover

A
  • Transaction or event which causes an increase in the ownership interest
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22
Q

Expenditure (Revenue or Capital)

A

Transaction or event which causes a decrease in the ownership interest

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23
Q

Revenue expenditure

A

Expense used in period or matched with revenue for the period

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24
Q

Capital Expenditure

A

Expenditure on items used in this and future periods

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25
Q

Where will revenue expenditure be and where will be capital expenditure be?

A

Revenue expenditure will be on the income statement whereas capital expenditure will be on the balance sheet

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26
Q

Balance Sheet

A

Shows the financial position of a business at a specific point in time

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27
Q

Income Statement

A

Summarises the income and expenditure of a business = profit or loss

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28
Q

Three main principles

A
  1. Dual effect
  2. Separate entity concept
  3. Accounting equation
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29
Q

Dual effect principle and car scenario

A

Every transaction will have at least TWO effects

one asset goes up, one asset goes down

Business buys a car
Business sells goods for cash
Business sells goods on credit

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30
Q

Separate entity concept

A

A business entity is separate from its owner(s)
The activities of the business should be kept separate from the activities of the owner(s)

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31
Q

Ledger

A

A ledger is just a book and a ledger account is just a page in that book

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32
Q

The Nominal Ledger

A
  • (aka general ledger) has a page (an account) for every item that appears on the Balance Sheet or Income Statement (Profit and Loss account).
  • Each page (account) has two columns: a debit side on the left and a credit side on the right. Each page is often referred to as a “T” account
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33
Q

Debits and Credits

Every transaction is recorded twice in the nominal ledger

The way to remember what goes where is?

A

DEADCLIC

Debit if increase in…
Expense
Asset
Drawings

Credit if increase in…
Liability
Income
Capital

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34
Q

The accounting equation and the dual effect

A

Every transaction has two effects on the accounting equation

If assets increase, then liabilities or capital must increase or another asset must fall.

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35
Q

Sally invests £3,000 in the business, what will increase?

A

Assets and Capital will increase by £3000

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36
Q

Sally buys £2,600 (from the £3000) of cooking utensils, what is the result?

A

Cash asset falls by £2600 so its now £400
Other assets increase by £2600

Assets = Liabilities + Capital

Cash 400
Utensils 2600
Total 3000 = 0 + 3000

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37
Q

Sally makes a profit of £200. What is the result?

A

Profit made is £200 so capital increases by 200

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38
Q

Sally takes £150 cash for herself from the business bank account. What is the result?

A

Cash and capital fall by £150
It is classed as Drawings

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39
Q

What is the accounting equation and what does each part mean

A

Assets = Liabilities + Capital

Assets = Something the business owns

Liabilities = Something the business owes to a third party

Capital = Something the business owes to the owner

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40
Q

If a business makes it a loss, it comes off..?

A

Both assets and capital

41
Q

Fill in the debits and credits

A
42
Q

Balancing an account (5 steps)

A
  1. Add up debits and credits on an account
  2. If one side is greater than the other, insert a ‘balancing’ figure on the lower side
  3. Balancing figure called balance carried forward (c/f) or carried down (c/d)
  4. Enter total figures on both columns
  5. The c/f figure becomes the b/f figure for the next period. Enter this below the total
    on the opposite side
43
Q

The Trial Balance

A list of Dr and Cr balances taken from the nominal / general ledger.
What is the purpose of this? (3)

A
  • Check to ensure Dr = Cr
  • Errors can still exist even if Dr = Cr
  • Useful stage in the preparation of final
    accounts
44
Q

Why could the trial balance not balance?

Book-keeping errors such as: (5)

A
  • Only a Dr or Cr side of a transaction may be posted with
    the other half being omitted.
  • A Dr or Cr entry may be made on the wrong side of the ‘T’
    account
  • Different amounts may be posted to the Dr and Cr sides
    (eg transposition errors)
  • The ‘T’ account may be added up incorrectly and an
    incorrect balance transferred to the trial balance
  • A Dr balance is entered onto the trial balance as a Cr
    balance or vice versa
45
Q

Suspense account

If such an error has occurred, the trial balance will not balance so…

On preparing the year end accounts…

A

If such an error has occurred, the trial balance will not balance so…

  • We make it balance by creating a suspense account

On preparing the year end accounts…

  • the errors must be found and removed
46
Q

Accounting Adjustments

Accounting Adjustments are necessary… (2)

A
  • If the trial balance does not balance
  • To comply with the key accounting conventions and assumptions
47
Q

What is the IASB Framework

A
  • Sets out the concepts which underlie the preparation of financial statements
48
Q

Key accounting assumptions

  • Accruals or Matching…
  • Going concern
A

Accruals or Matching

  • Expenses/Income should be matched to the period they relate and to the income/expenses they generate

Going concern

  • Assume entity will continue to trade for the foreseeable future
49
Q

IASB Framework

Other assumptions (8)

A
  • Consistency
    Of accounting treatment or presentation
  • Prudence
    Slow to recognise profits/gains, quick to anticipate losses
  • Materiality
    Influence economic decision making of users
  • Offsetting
    Report items separately
  • Comparative information
    Disclose previous period
  • Substance over form
    Report reality, not legal form
  • Neutrality
    Free from bias
  • Completeness
    No material omissions
50
Q

Other Important Concepts

A
  • Business entity
    Separation of owner from the business
  • Money Measurement
    Only deal with items to which a monetary value can be attributed
  • Historical Cost
    Transactions recorded at cost when occurred
  • Stable Monetary Unit
    Eg £ or $ - Assume value of unit is constant
  • Realisation
    Recognise income and profits when realised
  • Duality
    Every transaction has two effects
51
Q

Adjustments needed as a result of the key accounting concepts (why for each one)

  • Accruals & Prepayments
  • Inventory (stock) and the cost of sales
  • Bad and doubtful debts
  • Depreciation
A
  • Accruals & Prepayments
    To match expenses to the period they relate
  • Inventory (stock) and the cost of sales
    To match sales with actual cost of those sales
  • Bad and doubtful debts
    To be prudent in recognising debts that may not be recoverable
  • Depreciation
    To match cost of a non current asset over its useful economic life
52
Q

Profit and cash flow

Formula for cash flow vs profit

Definition of income and expenses

Point about profit and cash flow

Biggest difference

A

Cash flow = Cash in – Cash out
Profit = Income – Expenses

Income:

  • Value of goods and services sold during a period

Expenses:

  • value of goods and services consumed in generating income

Profit is not a measure of cashflow.

A profitable business may need an overdraft. A loss making business may have cash .

Income and expenses involve receivables and payables whereas cash is not about credit or what is owed, just what you have or have given out

53
Q

Matching/Accruals – Key accounting concept

What is the aim?
What is it about?
What should we remember?

A

The aim is to show expenditure in the period to which it belongs, and not to the period when payment is made.

  • Many expenses ‘overhang’ more than one accounting period. Eg Rent, Rates, Insurance, Licence costs, Electricity, Telephone, accountancy/audit fees etc.
  • Remember we should recognise an expense when the goods or services are consumed
54
Q

Matching/Accruals – Key accounting concept EXAMPLE

Accountancy fees

The accountant will prepare the accounts after the year end and therefore send their invoice after the year end.

However the expense is “_________” in the year and so
needs to be accounted for __ ____ _____.

A

The accountant will prepare the accounts after the year end and therefore send their invoice after the year end.

However the expense is “consumed” in the year and so
needs to be accounted for in the year.

55
Q

Accruals

What is it?
What do we need to recognise?

A

Expense incurred but not yet invoiced

We need to recognise the expense and also recognise the liability

56
Q

Rates - Example

Business rates are normally required to be paid annually in advance

If a business paid its business rates for the 12 month period to 31 March 2024 in April 2023 and had a year end of 30th June 2023 then 9 months of this payment relates to the next year

A
57
Q

Prepayments

When is the expense paid?
We need to…?

A
  • Expense paid in advance
  • We need to remove the prepaid expense and recognise the asset
58
Q

Balance sheet as at … (picture)

A
59
Q

Susan started to trade on 1 June 2023 and has prepared the following trial balance after her first 4 months as at 30 September 2023

  • The £1,000 rates expense relates to the 10 months to 31st March 2024 (£100 pm)
  • This expense covers 10 months to 31 March 2024 but we only want the 4 months to 30 September 2023

The £150 electric expense relates to the 3 months to 31st August 2023

A
  • The £1,000 rates expense relates to the 10 months to 31st March 2024 (£100 pm)
  • This expense covers 10 months to 31 March 2024 but we only want the 4 months to 30 September 2023
    Susan has prepaid

The £150 electric expense relates to the 3 months to 31st August 2023
This expense covers 3 months but we need 4 months to 30 September 2023
Susan needs an accrual for

60
Q
A
61
Q

Key Points, Accrual vs Prepayment

A
  • Accrual
    • Increase the expenses in IS and recognise the liability in the BS
    • Dr Expense (IS), Cr Accruals (liability in BS)
  • Prepayment
    • Decrease the expenses in IS and recognise the asset in the BS
    • Dr Prepayment (Asset in BS), Cr Expense (IS)
62
Q

Bad Debt

Some customers may never pay. They may go “bust”. In these circumstances: (3)

A
  • The sales figure is not altered
  • The loss is recognised as an expense in the IS
  • A new type of expense appears in the IS alongside electricity, wages, insurance etc
63
Q

Prudence
What is prudence?
If a business believes a debtor will not pay what should they do?

What is bad debt?

What is doubtful debt?

A

Slow to recognise profits and gains, but swift to anticipate losses

If a business believes a debtor will not pay they should be prudent and recognise this in the accounts

Bad debt = debt that is definitely irrecoverable (eg debtor bankrupt

Doubtful debt = some chance of recovery, but also a chance of non-payment

64
Q

Doubtful Debts

  • The accountant is being ______ in recognising the risk of ___-_______ and makes a charge to the __and some _________ to the value of ___________ in the __
  • The adjustment may be against a _______ ________, or may be in the form of a _______ _________ set a percentage of total receivables

What would the Journal Entry look like?

Normally the same expense account is used as for bad debts in the IS, but separate accounts could be used

A
  • The accountant is being prudent in recognising the risk of non-payment and makes a charge to the IS and some reduction to the value of receivables in the BS
  • The adjustment may be against a specific debtor, or may be in the form of a general provision set a percentage of total receivables

Journal Entry

Dr Bad Debt expense (IS) 100
Cr Provision for Doubtful Debts (BS) 100

65
Q

Introduction to sales and receivables

  • Sales are either __ ______ or for ____________ __________
  • Receivables arise when a business makes a _______ sale

What are the two effects of a sale?

What are the two effects upon settlement?

A
  • Sales are either on credit or for immediate payment
  • Receivables arise when a business makes a credit sale

Sale:
Dr Receivables 300
Cr Sales 300

Upon settlement: (payment by debtor/receivable)
Dr Cash/Bank 300
Cr Receivable 300

66
Q

Provision in subsequent years

  • If the provision is not used/needed it is
    ____________ ______ _____to the next year. It
    would appear in the __ as a ______entry.
  • In the next year Heidi decides to increase the
    provision to £1,500:
  • The balance sheet ___________ figure will be
    shown net of the £1,500
A
  • If the provision is not used/needed it is automatically carried over to the next year. It would appear in the TB as a credit entry.
  • In the next year Heidi decides to increase the provision to £1,500:
  • The balance sheet receivables figure will be shown net of the £1,500
67
Q

Example – journal entries

Extract from the Trial Balance as at 31 October 2023

Cr£
Prov. for doubtful debts 1,500

Dr£
Receivables 75,000
Electric 2,200
Insurance 3,000

The following adjustments are to be made:

  • A receivable of £2,500 has to be written off, and the general provision is to be adjusted to 3% of receivables.
  • The last electric bill paid was for £600 and covered the three months to 30th September 2023
  • The last insurance bill paid in the year was for £1,800 and covered the 12 months to 31st March 2024.

Write out the journal entries for the above

Prepare IS and BS extracts

A
  1. Write off of Bad Debt
    Dr
    Cr
    Being the write off of the bad debt
  2. Calculation of general provision:
    £75,000 - £2,500 = £72,500
    £72,500 @ 3% = £2,175
    £2,175 is the final provision needed. Already have £1,500 provision so increase by £675

Dr
Cr
Being the increase in the general provision

  1. Electric Accrual
    Dr
    Cr
    Being the accrual for Oct 23 (£600 x 1/3)
  2. Insurance Prepayment:
    Paid 12m to 31 March 2024
    Prepaid Nov, Dec, Jan, Feb, Mar
    Prepayment = £1,800 x 5/12 = £750
    Dr
    Cr
    Being the prepayment for Nov - March
68
Q

Extract from the Income Statement

Expenses

Bad Debt Expense (2,500 + 675) 3,175
Electric (2,200 + 200) 2,400

Insurance (3,000 – 750) 2,250
2,500 + 675

A

Extract from the Balance Sheet

Current Assets
Receivables 72,500 (75,000
– 2,500)
Less provision (2,175)
70,325
Prepayments 750

Current Liabilities

Accruals 200

69
Q

Adjustments needed as a result of the key accounting concepts (what is each ones purpose)

  1. Accruals & Prepayments
  2. Inventory (stock) and the cost of sales
  3. Bad & doubtful debts
  4. Depreciation
A
  1. Accruals & Prepayments
  • To match expenses to the period they relate
  1. Inventory (stock) and the cost of sales
  • To match sales with actual cost of those sales
  1. Bad and doubtful debts
  • To be prudent in recognising debts that may not be recoverable
  1. Depreciation
  • To match cost of a non current asset over its useful economic life
70
Q

What is the double entry of an accrual and a prepayment?

A

Accrual = Dr Expense
Cr Accrual

Prepayment = Dr Prepayments
Cr Expense

71
Q

Key accounting concept - Accruals

  • The __________ recognised in the __________ ____________ are those related to the ______ recorded.

i.e. sales should be matched against the cost of those sales

A
  • The expenses recognised in the income statement are those related to the sales recorded.

i.e. sales should be matched against the cost of those sales

72
Q

Cost of sales adjustment - Example

Jonny started to trade selling rugby balls. He bought 100 at £10 each and in the year sold 80 for £15 each
£
Sales (80 @ £15) 1,200
Less purchases (100 @ £10) (1,000)
Difference 200

Is this difference Jonny’s profit and why?

A

No because profit is not a measure of cashflow.

A profitable business may need an overdraft. A loss making business may have cash

73
Q

Cost of sales adjustment - Example - Jonny continued

Sales should be matched with _____ __ _____

Sale proceeds from selling 80 balls should be matched with the ______ of _______ 80 balls

The 20 balls he has not sold should be removed from the ___________ ___________ and recognised as an ______ in the _________ ______

A

Sales should be matched with cost of sales

Sale proceeds from selling 80 balls should be matched with the cost of buying 80 balls

The 20 balls he has not sold should be removed from the income statement and recognised as an asset in the balance sheet

74
Q

Cost of sales adjustment

Jonny started to trade selling rugby balls. He bought 100 at £10 each and in the year sold 80 for £15 each

What should this look like?

A

Sales (80 @ £15) 1,200
Less cost of sales
purchases (100 @ £10) 1,000
Less closing inventory (20 @ £10) (200)
(800)
Gross Profit 400

75
Q

Cost of sales adjustment - Jonny year 2

Next year Jonny bought another 550 balls
At the year end he had 125 remaining.
How many has he sold in the year?

A

Opening inventory 20 balls
Bought in year (purchases) 550 balls
570 balls
Less Closing inventory (125 balls)
Balls sold in the year 445 balls

76
Q

Cost of sales formula

A

Cost of sales = (opening inventory + purchases) - closing inventory

77
Q

Cost of sales

  • Do not confuse no of units with their value. The income statement contains _____ not units
  • Cost of sale adjustment ensures we match the sales ________ _________ with the ______ of the goods which have been _____. Otherwise profit figures would be _________ or _________ depending on whether we had sold more inventory (stock) than we had purchased during the year or vice –versa.
  • Closing inventory (stock) from one period is always the _________ inventory (stock) for the next period.
  • The opening inventory figure (if there is any) will always appear as a ______ balance in the trial balance.
  • Opening inventory is an ______ but goes on the _________ __________
  • Closing inventory goes on the __ and __
A
  • Do not confuse no of units with their value. The income statement contains values not units
  • Cost of sale adjustment ensures we match the sales revenue gained with the costs of the goods which have been sold. Otherwise profit figures would be boosted or reduced depending on whether we had sold more inventory (stock) than we had purchased during the year or vice –versa.
  • Closing inventory (stock) from one period is always the opening inventory (stock) for the next period.
  • The opening inventory figure (if there is any) will always appear as a Debit balance in the trial balance.
  • Opening inventory is an asset but goes on the income statement
  • Closing inventory goes on the IS and BS
78
Q

Inventory: Valuation

  • At the end of the accounting period there will be a stock take. (2 reasons why?)
  • Inventory is valued at the lower of cost and Net Realisable Value (NRV) (what is NRV?)
A
  • At the end of the accounting period there will be a stock take.
  1. To count the actual quantity of each item
  2. To note slow-moving items, damaged goods, obsolete items
  • Inventory is valued at the lower of cost and Net Realisable Value (NRV)
    - NRV is the new value of an item and what you can sell it for
79
Q

Inventory is valued at the lower of cost and Net Realisable Value

What is cost?

  • General accounting rule – use _______ cost rather than ________ cost but…
  • Inventories may comprise _____________ products such as oil, gas, rugby balls etc.
  • They may be purchased throughout the year at a ________ of _______.
A
  • General accounting rule – use historic cost rather than current cost but…
  • Inventories may comprise homogenous products such as oil, gas, rugby balls etc.
  • They may be purchased throughout the year at a variety of prices.
80
Q

Possible costing solutions (3 and their definition)

A

FIFO: First in, First out

  • Goods which arrive first are used first (particularly for perishable goods)

LIFO: Last in, First out (Disallowed under International Accounting Standards)

  • Goods which arrive last are used first

WAC: Weighted average cost

  • Goods are valued at the average price of the inventories held
81
Q

Which method should be used?

In financial accounting we can only use?
And what concept should we keep to?

What method can we use in management accounting?

A

Only FIFO or WAC may be used in financial accounting. The same method should be used every year = Consistency concept

Any method may be used in management accounting

82
Q

What is Net Realisable Value?

A

Estimated future selling price less all additional costs to be incurred before sale

83
Q

Mark-ups and margins

What are they calculated on?
What are they used for?

A
  • Margin is calculated on sales (sales is the 100% figure)
  • Mark-up is calculated on cost (cost is the 100% figure)

Profit margin = profit/sales

Sales = cost + gross profit

Margins and mark-ups can@ be used to establish costs and profits

84
Q

Depreciation

Definition?

Why do we need it?

A

Depreciation in the systematic allocation of a non-current asset over its useful economic life

We need it to spread the cost of a non current asset gradually over the years of its use and wearing out

85
Q

Imagine farmer John writes a cheque and buys a tractor for £20,000. He will use it for five years and at the end of that time it will have no further use or value.
Is this purchase an example of revenue or capital expenditure?

A

Capital

86
Q

John uses the bank a/c to buy a tractor for £20,000.
What is the double entry for this purchase?

The tractor is now in the _________ _______ as a ____ ________ ______

Each year we now need to take an element of this cost into the income statement as he is using the tractor to generate his _____

A

Dr Vehicles 20,000
Cr Bank 20,000

The tractor is now in the balance sheet as a non current asset

Each year we now need to take an element of this cost into the income statement as he is using the tractor to generate his sales

87
Q

Calculation of Depreciation
Two common methods:

A

Straight line method

Charge an equal amount of depreciation every year

Reducing balance method

Charge more depreciation in the earlier years of use, less in the later years

88
Q

Straight line method

What is the formula?

Example: An item costs £11,000, the residual value is £1,000 and the expected useful life is 4 years. What is the annual depreciation charge?

A

Annual Depreciation = Cost – Residual Value/
Estimated useful life

Annual Depreciation = 11,000 – 1,000/
4
= £2,500 p.a.

89
Q

To spread the decline in value we might take the total cost of £20,000 and spread over the five years. Ie the value of the tractor in the balance sheet will reduce by £4,000 each year

A

Opening BS value Depreciation taken to IS Closing BS value
Year 1 £20,000 £4,000 £16,000
Year 2 £16,000 £4,000 £12,000
Year 3 £12,000 £4,000 £8,000
Year 4 £8,000 £4,000 £4,000
Year 5 £4,000 £4,000 £NIL

90
Q

The Net Book Value (NBV) of a non current asset is its…

What do the terms in the formula mean?

A

The Net Book Value (NBV) of a non current asset is its historic cost minus all depreciation charged to date (accumulated depreciation) on that asset

Historic cost = original purchase price

Accumulated depreciation = total depreciation charged / taken to the Income Statement since purchase of the asset

91
Q

Reducing balance method

What is it?
Example?

A

Apply a constant % of the Net Book Value every year

Example: An item costs £12,000 and is to be depreciated at a rate of 25% reducing balance

https://newcastle-my.sharepoint.com/:i:/r/personal/c3023551_newcastle_ac_uk/Documents/Pictures/Screenshot%202023-11-26%20003847.png?csf=1&web=1&e=HNHK0G

92
Q

Depreciation: Double Entry (what are the 2 effects)

What do we not do?

A

Dr Depreciation Charge (IS)
Cr Accumulated Depreciation (BS)

n.b we do NOT credit the non current asset directly

93
Q

Disposal of non-current assets

When an asset is sold, it needs deleting from the accounts

The relevant assets must…(2)

Anything more than the NBV is a _____
Anything less than the NBV is a _____

A
  • Cost must be removed
  • Accumulated depreciation must be removed

Anything more than the NBV is a profit
Anything less than the NBV is a loss

94
Q

Types of supply (3)

A

Standard Rated

  • most goods and services
  • rate of 20%

Zero Rated

  • Taxable supplies but 0%
  • eg. Food production, public transport, children’s clothes

Exempt

  • Not taxable supplies
  • eg. education, land
95
Q

Main principles of VAT (3)

A
  • VAT registered traders are required to charge VAT on their sales
    • Output VAT
  • VAT registered traders can generally reclaim any VAT they have suffered on purchases
    • Input VAT
  • VAT registered traders pat over the difference to HMRC
    - Output - Input = payable to HMRC
96
Q

Accounting for VAT

  • The double entry for a credit sale of 1000 plus VAT?
  • The double entry for a purchase on credit of 600 plus VAT?
A

Dr Receivables 1200
Cr Sales = 1000
Cr VAT = 200 (liability to pay to HMRC)

Dr Purchases = 600
Cr Payables = 600
Cr VAT = 120 (asset as HMRC owe you)

97
Q

VAT and Discounts

Two types of discounts?

  • VAT is always calculated…
A
  • Trade discounts
  • Early settlement discounts
  • VAT is always calculated after all potential discounts and NO adjustment is made even if the discount is not taken up
98
Q

VAT and Non-current Assets

When a VAT registered business buys a non current asset to use in its trade it can recover the VAT it suffers on the purchase. (What is this called?

The non current asset is therefore stated net of VAT in the SoFP and depreciation is then calculated.

VAT however cannot be recovered when a VAT registered business buys a _______ ____. As a result the car is stated including VAT in SoFP and depreciation is then calculated.

A

When a VAT registered business buys a non current asset to use in its trade it can recover the VAT it suffers on the purchase (Input VAT)

The non current asset is therefore stated net of VAT in the SoFP and depreciation is then calculated.

VAT however cannot be recovered when a VAT registered business buys a motor car. As a result the car is stated including VAT in SoFP and depreciation is then calculated.

99
Q

Key Points

  • VAT is a ___ on most goods and services
  • VAT is charged by VAT ___________ _________
  • The final burden typically falls on the ____ ___________
  • Businesses are ___________ of VAT for the ______________
  • Every ________ business pays difference between output VAT and input VAT
  • Figures in the Income Statement generally ________ VAT
  • Figures in the SoFP generally ________ VAT
A
  • VAT is a tax on most goods and services
  • VAT is charged by VAT registered businesses
  • The final burden typically falls on the final consumer
  • Businesses are collectors of VAT for the government
  • Every quarter business pays difference between output VAT and input VAT
  • Figures in the Income Statement generally exclude VAT
  • Figures in the SoFP generally include VAT

Y1 - Financial Accounting (21 decks)

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