Semester 1 Exam Flashcards

Question

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

Answer 1

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

Answer 2

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

Answer 3

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

Answer 4

1. Dual effect 2. Separate entity concept 3. Accounting equation

Answer 5

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

Answer 6

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)

Answer 7

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

Answer 8

- (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

Answer 9

**DEADCLIC** *Debit if increase in…* Expense Asset Drawings *Credit if increase in…* Liability Income Capital

Answer 10

Every transaction has two effects on the accounting equation If assets increase, then liabilities or capital must increase or another asset must fall.

Answer 11

Assets and Capital will increase by £3000

Answer 12

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

Answer 13

Profit made is £200 so capital increases by 200

Answer 14

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

Answer 15

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

Answer 16

Both assets and capital

Answer 17

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

Answer 18

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

Answer 19

- 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

Answer 20

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

Answer 21

- If the trial balance does not balance - To comply with the key accounting conventions and assumptions

Answer 22

- Sets out the concepts which underlie the preparation of financial statements

Answer 23

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

Answer 24

- 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

Answer 25

- 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

Answer 26

- 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

Answer 27

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

Answer 28

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

Answer 29

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.

Answer 30

Expense incurred but not yet invoiced We need to recognise the expense and also recognise the liability

Answer 31

- Expense paid in advance - We need to remove the prepaid expense and recognise the asset

Answer 32

- 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

Answer 33

- 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)

Answer 34

- 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

Answer 35

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

Answer 36

- 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

Answer 37

- 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

Answer 38

- 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

Answer 39

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 3. Electric Accrual Dr Cr Being the accrual for Oct 23 (£600 x 1/3) 4. 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

Answer 40

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

Answer 41

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

Answer 42

Accrual = Dr Expense Cr Accrual Prepayment = Dr Prepayments Cr Expense

Answer 43

- 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

Answer 44

No because profit is not a measure of cashflow. A profitable business may need an overdraft. A loss making business may have cash

Answer 45

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

Answer 46

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

Answer 47

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

Answer 48

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

Answer 49

- 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

Answer 50

- 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

Answer 51

- 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.

Answer 52

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

Answer 53

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

Answer 54

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

Answer 55

- 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

Answer 56

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

Answer 57

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

Answer 58

**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

Answer 59

Annual Depreciation = Cost – Residual Value/ Estimated useful life Annual Depreciation = 11,000 – 1,000/ 4 = £2,500 p.a.

Answer 60

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

Answer 61

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

Answer 62

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 ## Footnote 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

Answer 63

Dr Depreciation Charge (IS) Cr Accumulated Depreciation (BS) n.b we do NOT credit the non current asset directly

Answer 64

- 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

Answer 65

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

Answer 66

- 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

Answer 67

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)

Answer 68

- 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

Answer 69

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.

Answer 70

- 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