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Accounting > Summary Notes > Flashcards

Summary Notes Flashcards

1
Q

What is the accounting equations?

A

Assets = Liabilities + Capital

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2
Q

How do you calculate cost of sales from the SPL?

A

Opening Inventory + Purchases + Carriage In - Closing Inventory

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3
Q

How do you calculate Gross Profit?

A

Revenue - Cost of Sales

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4
Q

What do you include in the first half of the Statement of Financial Position (Balance Sheet under UK GAAP)?

A

Non-Current Assets
Land & Buildings
Plant & Machinery
Motor Vehicles

Current Assets
Inventory
Trade Receivables 
Other Receivables
Cash at Bank

Total Assets

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5
Q

What do you include in the bottom-half of the SFP?

A

Capital + Liabilities:

Capital
Opening Capital
Capital Introduced
Profit

Less: Drawings

Non-Current Liabilities
Loans
Current Liabilities
Trade Payables
Other Payables
Bank Overdraft
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6
Q

What do you include in the first half of the Statement of Profit and/or Loss?

A 
Revenue
Cost of Sales
     - Opening Inventory
     - Purchases
     - Carriage In
     - Less: Closing Inventory

Gross Profit
Other Income
Rent receivable

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7
Q

What do you include in the bottom-half of the SPL?

A 
Expenses
Insurance
Irrecoverable Debt Expense
Carriage Out
Advertising
Stationery 
Rent and Rates
Profit on sale of NCA
Depreciation

(Add these together then subtract from gross profit to achieve:)

Net Profit

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8
Q

What are the Debit and Credit rules?

A

Debit:
Increase: Expenses, Assets, Drawings
Decrease: Income, Liabilities, Capital

Credit:
Increase: Liabilities, Income, Capital
Decrease: Expenses, Assets, Drawings

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9
Q

The individual ledger accounts are referred to as what?

A

The individual ledger accounts are collectively referred to as the nominal ledger

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10
Q

What are the steps to balancing off a ledger account?

A
  1. Add up the debit and credit sides individually to see which is the biggest
  2. Take the higher total and make it the total for both sides of the account
  3. Insert a balancing figure to the side that does not currently add down calling this ‘Balance C/F’
  4. Take the c/f figure and make it the b/f figure underneath the total on the opposite side
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11
Q

Where should the Balance b/f be for a credit and a debit?

A

The balance b/f should be on the debit side for an asset, an expense, and the drawings ledger

The balance b/f should be on the credit side for a liability, income, and the capital ledger

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12
Q

What are the Qualitative characteristics under the FUNDAMENTAL accounting conventions?

A

Fundamental:

  • Relevance
  • Faithful representation
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13
Q

What are the Qualitative characteristics under the ENHANCING accounting conventions?

A

Enhancing:

  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
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14
Q

What are the Qualitative characteristics under the ACCOUNTING CONCEPTS accounting conventions?

A

Accounting concepts:

  • Going concern
  • Accruals/Matching
  • Materiality
  • Offsetting
  • Business Entity Concept
  • Duality Concept
  • Historic Cost Convention
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15
Q

What is an Accrual and how to do you record it?

A

Where you owe money at the end of the year for an expense incurred but not paid.

To account for an Accrual:

Dr Expense a/c
Cr Accruals/Other payables

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16
Q

What is a shortcut in the exam to determine the charge for an accrued expense during the year?

A

SPL charge = cash paid in year - opening accrual + closing accrual

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17
Q

What is a prepayment and how do we account for it?

A

A prepayment is a receivable for an expense paid for in advance of the period that it relates to

To record prepayment:

Dr Prepayments/other receivables
Cr Expense a/c

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18
Q

What is the shortcut to calculate a prepayment?

A

SPL Charge = Cash paid in year + opening prepayment - closing prepayment

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19
Q

What is accrued income? How do we record it?

A

Accrued income are receivables for income earned in the year but payment not yet received

To record:

Dr Accrued income/other receivables
Cr Income a/c

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20
Q

What is the shortcut to determine the income receivable during the year?

A

SPL income = Cash received in year - opening accrued income + closing accrued income

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21
Q

What is deferred income? How do we record this?

A

When you ‘owe’ money at the end of the year for income received in advance of the period that it relates to

To record:

Dr Income a/c
Cr Deferred Income/other payables

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22
Q

What is the shortcut for determining deferred income?

A

SPL Income = Cash received + opening deferred income - closing deferred income

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23
Q

What is opening inventory?

A

The balance on the ‘Inventory’ a/c (SOFP ledger a/c) at the end of the previous year rolls forward to the new accounting period but is renamed ‘Opening Inventory’ (SPL ledger a/c)

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24
Q

What is the closing inventory? How is it valued?

A

During the accounting period the effect of a sale or purchase on the level of inventory is ignored. Instead the business performs a stock count on the last day of the accounting period.

Each class of inventory is then valued at the lower of:

  • Cost (FIFO, AVCO) and,
  • Net realisable value (Sales price less costs to sell or modification costs)
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25
Q

How do you account for the year-end inventory?

A 
Dr Inventory (SOFP - asset)
Cr Closing Inventory (SPL - COS)
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26
Q

What are some closing inventory complications and how do you account for these?

A
  • Goods stolen or destroyed - must be excluded from purchases:

Dr Stock write off a/c
Cr Purchases

  • Drawings of inventory by owner - must be excluded from purchases:

Dr Drawings
Cr Purchases

27
Q

What are the two types of cost structures? How do we calculate them?

A

Gross Profit Margin (of 25%) = Sales (100) - cost of sales (75) = gross profit (25)

Mark-up on cost (of 25%) = Sales (125) - cost of sales (100) = gross profit (25)

28
Q

What costs include capital expenditure? Which exclude revenue expenditure?

A

Includes:

  • Purchase price
  • Delivery costs
  • Legal fees
  • Enhancement expenditure

Excludes:

  • Repairs
  • Renewals
  • Repainting
29
Q

What is the matching concept?

A

Match cost of an asset to the income it generates

30
Q

How do you calculate straight line depreciation?

A

Straight line: charged monthly i.e. time apportioned

(Cost - Residual Value) / Useful Life
or
Depreciation charge = % x cost

31
Q

How do you calculate reducing balance depreciation?

A

You will not have to calculate what amount of reducing balance depreciation should be charged monthly

Depreciation charge = % x carrying amount

32
Q

What is the double entry for depreciation?

A

Dr Depreciation Expense (SPL)

Cr Accumulated Depreciation (SOFP)

33
Q

What do you do if the estimate of useful life or residual value changes?

A

Calculate depreciation going forward as:

Depreciation charge = (carrying amount at date of change - new residual value) / Remaining useful life

34
Q

What do you do if you change the depreciation method from straight line to reducing balance?

A

Depreciation charge = % x carrying amount at date of change

35
Q

How do you account for a disposal/part exchange?

A
  1. Eliminate cost:

Dr Disposals
Cr NCA cost

  1. Eliminate accumulated depreciation:
    Dr Accumulated Depreciation
    Cr Disposals
  2. Record proceeds/PEA
    Dr Cash/NCA cost
    Cr Disposals
  3. If a part exchange, also record cash paid to acquire new asset:

Dr NCA cost
Cr Cash

36
Q

When has an impairment occurred? How do we account for this?

A

Impairment has occurred if the carrying amount is greater than the recoverable amount (this is the greater of the fair value less costs to sell or the value in use)

Impairment loss = carrying amount - recoverable amount

Accounting treatment:

Dr Impairment Expense X
Cr Accumulated Depreciation X

37
Q

How do you write off an irrecoverable debt?

A

Dr Irrecoverable Debt Expense

Cr Trade Receivables

38
Q

How do you account for the recovery of an irrecoverable debt previously written off?

A

Dr Cash

Cr Irrecoverable debt expense

39
Q

What is the approach to accounting for an allowance for receviables?

A
  1. Determine the movement in the allowance ince the previous year
  2. Account for movement only:

If it is an increase:

Dr Irrecoverable Debt Expense
Cr Allowance for receivables

If it is a decrease:

Dr Allowance for receivables
Cr Irrecoverable debt expense

40
Q

What is the shortcut to determine balance on irrecoverable debt expense for the year?

A

(Debts written off during year + Increase in allowance for receivables) - (Debts written off in previous years now recovered + decrease in allowance for receivables)

41
Q

What are the principles of VAT?

A
  • VAT is collected by a business on behalf of HMRC
  • A VAT registered business will:
    • charge output tax on sales and pay it to HMRC
    • Be charged input tax on purchases/expenses/NCA and reclaim it from HMRC
  • Periodically the output and input tax are netted off and it is the net amount that is either paid over to or reclaimed from HMRC
42
Q

How do you account for VAT?

A
  • Exclude VAT from NCA and SPL (i.e. record net of VAT)
  • Can’t reclaim business entertaining VAT and VAT on new motor cars, therefore include gross in SPL and SOFPc
  • Amount due to HMRC = output tax (VAT on sales) less input tax (VAT on purchases/expenses/NCA)
  • Rate = 20%
43
Q

How do you calculate VAT?

A

Net selling price (VAT exclusive) - 100%
VAT - 20%

= Gross selling price (VAT inclusive price) 120%

If you are looking for VAT from the inclusive price, you times the value by 1/6 to arrive at the VAT price

If you are looking for the VAT from the VAT exclusive price, we times by 1/5 to arrive at the VAT amount

44
Q

How do you record VAT on sales and VAT on purchases?

A

VAT on sales:

Dr Trade Receivables VAT inclusive amount
Cr Sales VAT exclusive amount
Cr VAT VAT

VAT on purchases:

Dr Purchases VAT exclusive amount
Dr VAT VAT
Cr Trade Payables VAT inclusive amount

45
Q

What does VAT look like in a ledger account?

A

Debit side:
VAT on purchases
Payments to HMRC
c/f

Credit:
VAT on sales
Receipts from HMRC

it is possible to have a debit balance in Input VAT exceeds Output VAT

46
Q

How do you deal with the Prompt payment discount with VAT? What do you do if the customer pays early vs what do you do if they do not? (include double entries)

A
  • The VAT is based on the actual price paid (i.e. depends whether or not the discount is taken)
    The initial charge will therefore be based on the full price and an adjustment will be made later if necessary

Eg., sell goods to a customer with a selling price £1000 plus VAT. There is a 10% prompt payment discount if they pay within 20 days
The VAT charged on the sale would be:
1,000 (selling price) x 1/5 = 200

Double entry:

Dr Receivables 1200 (1000+200)
Cr Sales 1000
Cr VAT 200

Customer pays early:
Reduce VAT by discount eg., (1000 x 90%) x 1/5 = 180
Add to selling price (now also discounted) (1000 x 90%) + 180 = 1080

Dr Cash 1080
Dr VAT 20 (200-180)
Dr Sales 100
Cr Receivables 1200

Doesn’t pay, no adjustment:

Dr Cash 1200
Cr Receivables 1200

47
Q

What are the modules within an accounting system?

A

Nominal ledger - main record for preparing trial balances
Receivables ledger - separate ledger account for each credit customer
Payables ledger - separate ledger account for each credit supplier

48
Q

When is a ‘suspense account’ created?

A
  • The accounting system attempts to match transactions on transaction report to known transactions and process these appropriately
  • Any ‘unknown’ transactions are recorded in a temporary account known as a ‘suspense account’ and will be reported on an exception report, to be investigated by the accountant
  • Once identified, the suspense account will be removed and the transaction will be recorded in the correct account within the accounting system
  • These include those that are unexpected
49
Q

What goes within a receivables ledger account?

A

Debit side:

Balance b/f
Credit sales
Dishonoured cheques
Refunds of credit balances

Credit:
Cash received
Discounts allowed
Irrecoverable debts
Contra 
c/f
50
Q

What goes within a payables ledger account?

A

Debit side:

Cash paid
Discounts received
Contra
c/f

Credit:

B/f
Credit purchases
Refunds of debit balances

51
Q

What are the 3 main reasons why cash book balance doesn’t qual bank balance and how do we resolve these?

A
  1. Timing differences. Items recorded in the cash ledger but not yet shown on bank statement. To resolve, adjust the bank record not the cash T account
  2. Errors on bank statement. The bank has debited or credited your account when it should have put the transaction through another customer’s account. To resolve, adjust the bank record, not the cash T account
  3. Errors in Cash T account. Items appear on the bank statement, but have either been omitted from the Cash T account or recorded at the wrong value in the Cash T Account. To resolve, adjust cash T account
52
Q

How do you account for an error in a supplier statement?

A

Within the payables ledger

Credit side:
Balance per question
Adjustment for errors

Debit:
Adjustment for errors
Revised balance c/f

Balance b/f on the credit side = balance per the supplier statement (+/-) the adjustment for errors = balance per the payables ledger account

53
Q

What is an error of omission?

A

A transaction has been completely omitted from the accounting records

54
Q

What is an error of commission?

A

A transaction had been recorded in the wrong account but in the right financial statement

55
Q

What is an error of principle?

A

a transaction has conceptually been recorded incorrectly (e.g., debited as an expense rather than an asset)

56
Q

What is a compensating error?

A

Two different errors have been made which cancel each other out

57
Q

What is a transposition error?

A

The correct double entry has been made but two digits in the amounts are recorded the wrong way round

58
Q

How do you approach a question that includes a suspense account?

A
  • Think about the double entry that they DID DO
  • Think about the double entry that SHOULD HAVE been made
  • Think about what needs to be done to CORRECT
59
Q

What do you do if an adjusted journal will affect profit?

A

One side of the journal corrects a SOFP item and the other side of the journal corrects an SPL item

60
Q

What do you do if the adjusted journal will NOT affect profit?

A

Both sides of the correcting journal are SOFP items or both sides of the correcting journal are SPL items

61
Q

How do you approach partnerships?

A

Each partner is allocated their share of profit as follows:

  1. Allocate ‘salary’
  2. Allocate interest on capital
  3. Deduct interest on drawings
  4. Share residual profit as per profit sharing ratio (PSR)
  • Record profit shares as calculated above in current account along with drawings (debit drawings, credit share of profits)
  • Record capital injections and withdrawals of capital in the capital account (debit capital withdrawn, credit capital introduced and the balance bought forward)
62
Q

What are some complications that arise from an approach to partnerships?

A
  • Guaranteed minimum profit share:
  • Allocate profits in usual way
  • If partner with a guaranteed share is short, transfer shortfall from other partners as per the PSR or agreement
  • Loans from partners: the loan is not recorded as part of capital, but as a liability in the SOFP
63
Q

How do you approach a question that accounts for a change in partnership agreement or partners?

A
  • often happens mid-year
  • Treat accounting year in two sections therefore:
  • Number of months under old structure
  • Number of months under new structure
64
Q

How do you account for the retirement or admission of a partner?

A
  1. Transfer retiring partner’s current account balance to his capital account

Dr Current Account
Cr Capital Account

  1. Determine the value of goodwill and set up temporary goodwill account:

Dr Goodwill
Cr Capital Accounts (with each partner’s share of goodwill in accordance with old PSR)

  1. Now that the retiring partner has the total balance due to him in their capital account, clear this balance:

Dr Capital Account
Cr Cash
Cr Loan a/c (with any amount the business cannot afford to pay at this stage)

  1. Derecognise the goodwill:

Dr Capital Accounts (of remaining partners according to new PSR)
Cr Goodwill

Accounting (11 decks)

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