Test 2 Flashcards
Scrap value
• Residual / Scrap value – what the directors
imagine the Asset could be disposed of, at the end
of its useful life. Decided at time of acquisition.
Bad debts journal entry
• Dr Bad Debts Exp; Cr Accounts Receivable:
Debtor’s name (if avail)
Allowance for bad debts journal entry
Dr Bad Debts Expense; Cr Allowance for Doubtful Debts
Asset definition
An asset is:
• a present economic resource*
• Controlled** by the entity
• as a result of past events.
Current asset definition
According to IAS 1, an asset is classified as
a current asset when:
• it is expected to be realised within 12
months after the end of reporting period;
or
• it holds the asset mainly for the purpose
of trading; or
• it expects to realise the asset, or intends
to sell or consume it, in its normal
operating cycle; or
• it is cash or a cash equivalent.
All other assets are Non-Current Assets
Liability definition
a present obligation of the
entity
•to transfer an economic
resource
• as a result of past events.
Current liability definition
According to IAS 1, a liability is classified as
a current liability when:
• it is due to be settled within 12 months
after the end of the reporting period; or
• it holds the liability mainly for the purpose
of trading; or
• it expects to settle the liability in its
normal operating cycle;
• the entity does not have an unconditional
right to defer settlement of the liability for
at least 12 months after the end of the
reporting period.
Revaluation journal entry
Increased value recorded (DR Asset Type CR Reval
Surplus/Gain)
Recorded as an item in other comprehensive income
Equity
Equity is the transactions with the owners (shareholders). The
residual interest in the assets of the entity after deducting all its
liabilities. (Assets – Liabilities) AKA Net Asset Value or net ‘wealth’
of the entity. The amount due to owners (s/h) if all assets
liquidated and liabilities paid
Income
increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets (Bank/AR)
or decreases of liabilities (Inc Recd in Adv) that result in increases
in equity, other than those relating to contributions from equity
participants.
Expense
decreases in economic benefits during the
accounting period in the form of outflows or depletions of assets
(Bank/Expenses Prep) or incurrences of liabilities (AP) that result
in decreases in equity, other than those relating to distributions to
equity participants.
Bad debt journal entry
Dr Bad Debts Exp; Cr Accounts Receivable: Debtor’s
name (if avail
Accrued meaning
Payment that is outstanding
Three rates of VAT
Zero rate - financial / educational / health services / energy
saving (solar panels / heat pumps etc) / gambling?????
• Reduced rate - health and safety – power (elect & gas) / car
seats for children / aids to stop smoking
• Standard rate – everything else
Who should register for VAT
You should register for VAT if you supply goods
other than VAT Exempt goods and
• your total VAT taxable turnover for the last
12 months was over £85,000 (the VAT
threshold)
• you expect your turnover to exceed £85,000
in the next 30 days
Journal entry for VAT received on a sale
VAT received on a sale / service (Output Tax) is treated as a liability as it is
received on behalf of the HMRC and needs to be refunded (CL)
Journal entry for VAT paid on expenses
VAT paid on expenses / services received (Input Tax) is treated as an asset
as it can be used to reduce any amount owing to the HMRC, and could be
refunded to you (CA)
Journal entry for VAT
Exclusive amount + VAT amount = Inclusive amount
100% + 20% = 120%
Sales/ purchases/inventory + input/output VAT = bank
VAT on cost of sales
No VAT impact on cost of sales
Journal entry for inventory purchased on VAT
Debit to Inventory or Purchases (next slides/section!) – exclusive figure
• Debit to Input VAT
• Credit to Bank / Accounts Payable – inclusive
Journal entry for sales on VAT
Debit to Bank / Accounts Receivable – inclusive
• Credit to Sales - exclusive
• Credit to Output VAT
Periodic method of recording inventory
the inventory-on-hand figure and
therefore cost-of-sales figure are calculated
PERIODICALLY, i.e. at the end of the period, i.e. the month,
quarter or financial year.
• Using this method, when purchasing stock the journal
entry is:
• Debit Purchases (Exp), Credit Bank / Acc Payable
• When selling stock, the JE is:
• Debit Bank / Acc Receivable; Cr Sales.
• There is NO cost-of-sales entry.
• Stock-take at the end of the year determines Inventory on
Hand
Perpetual method of recording inventory
Perpetually keeping inventory up to date
Closing inventory value
Closing Inventory to always be valued at ‘lower of cost
and net realisable value’. Cost figure you will have, NRV is
the amount to be realised if sold, less any cost to sell.
Overstated inventory journal entry
• Cost of Inventory £950. Now redundant stock,
therefore selling price £925 and cost to sell
(commission etc) £50. Therefore NRV £875. Must be
written down by £75 TO £875.
• Dr Cost of Sales, Cr Inventory £75 method – (for
longer method see 12.6.2)
Inventory definition
assets that:
• are held for sale in the ordinary course
of business;
• are in the process of production for
sale;
• are held in the form of materials or
supplies to be consumed within the
business operation.
Mark up cost formula
Gross profit / cost price
Gross profit % formula
Gross profit / Sales price
PPE
Property, Plant and Equipment
A present economic resource, controlled by
the entity, as a result of past events. (Present economic
resource – a right that has the potential to produce
economic benefits.)
Recognition criteria for PPE
an item of PPE should only be
recognised if it is probable that economic benefits will
flow to the entity AND the value of the item can be
reliably measured. Conceptual framework – it results in
relevant information and it faithfully represents that
information.
Derecognising asset
- Calculate depreciation for current period. Dr Depreciation Expense Cr Accumulated Depreciation.
- Eliminate full cost of asset from asset account. Dr Disposal Cr Assets
- Accumulated depreciation is eliminated as a contra account. Dr accumulated depreciation Cr Disposal
- The proceeds on Disposal are recorded. Dr Cash Cr Disposal
- Profit or loss on Disposal is recorded. Dr Disposal Cr Profit on Disposal OR Dr loss on disposal Cr Disposal
Journal entry for revaluation method
Dr Land Cr Revaluation surplus
Private company limited by guarantee criteria
limited by Guarantee (The person or entity that promises to pay the debtor’s debts):
- Owned by shareholders, managed by directors, intention is to make a profit.
- Profits can be reinvested, or distributed via dividends
- Shareholder liability limited to value of share capital invested
• Private Company, no Share Capital, commonly used by charities, clubs, and community
enterprises.
Private company limited by shares criteria
Company name must end in Limited (Ltd). NB – different naming conventions globally!
• Share Issue Restricted. Prohibited from issuing shares to the public, offers are made
privately to investors or interested parties
• Share transfer restricted to within company, allows company to maintain control
• Minimum: Shareholder (1), Director (1), Share Capital £1
• Most common form of Company
• Examples – Google / Apple / Tesla / Meta (FB) / Microsoft
Public company criteria
limited by shares
- Owned by shareholders, managed by directors, intention is to make a profit.
- Profits can be reinvested, or distributed via dividends
- Shareholder liability limited to value of share capital invested
• Company name must end in Public Liability Company (PLC)
• Shares offered to the public – information made available through a
prospectus – sold on stock exchange
• Shares easily transferable – shares are bought and sold on the stock exchange
• Minimum: Shareholder (1), Directors (2), Share Capital £50,000
Ordinary shares
Main ‘risk-bearing’ shares of the organisation.
• Shareholders benefit through increased value of shares (if the
shareholder sells them) and through payment of dividends.
• Dividends: Shareholders have no rights to dividends unless
declared by Directors (and approved by s/h) at an AGM.
• Dividend is due to the shareholder in full once the dividend is
declared, regardless of when the share was bought or sold.
Preference shares
Payment of dividends on Preference Shares given
preferential treatment over payment of ordinary share
dividends.
• Preference dividend is expressed as a percentage of
the issue price of the share, and amount is calculated
according to how long the share was held.
• Can be Cumulative or Non-Cumulative (dividend due
accumulates or not).
• Can also be Redeemable. (Substance over form
regarding treatment.) If redeemable at a particular time at
a particular amount, or on request by the shareholders,
these are treated as a loan (therefore Liability and not
Equity). These dividends would be treated as interest
payments and should be recorded as such in the FS.
• Dividend calculated from when the share was held. If only
held for three months when dividend declared, then 3/12.
Debentures
Debentures are financial liabilities, smaller
loans obtained from a number of members of
the public, similarly to shares.
• Generally secured by a mortgage over
property or other assets.
• Fixed rate of interest and repayment terms.
• Negotiable document – i.e. can be sold to a
third party.
Dividends on ORDINARY SHARES
Dividends on ORDINARY SHARES are paid PER SHARE. I.e. the number of shares
and the payment per share must be known. Then the calculation is:
• Number of shares x dividend per share (usually quoted in ‘p’).
Dividends on PREFERENCE SHARES
Dividends on PREFERENCE SHARES are paid on the VALUE PER SHARE. I.e. the total
value of the shares at the given percentage rate. The calculation is:
• VALUE of shares x preference dividend percentage.
Journal entry when you have paid for a good and not received it
Dr trade receivables
Cr bank
When does depreciation start
When an asset becomes available for use
Journal entry for depreciation
When equipment depreciates journal entry is accumulated depreciation
Journal entry for supplies being used up
When supplies are used up they are entered as supplies expense
Allowance for bad debts is written journal entry
allowance for doubtful debts and as bad debts expense
billed meaning
receiving payment
draw up a financial statement
statement of P/L
statement of changes in equity
statement of financial position (assets, liabilities and equity)
statement of P/L sections
Sales, cost of sales, gross profit
Other income
Operating expenses, finance cost
Profit for the period
statement of changes in equity
separated into capital, share premium and retained profit
Balance at …
Profit for the period (rp)
distributions (-rp)
capital contributions (c)
dividends (-rp)
Share issue (sp)
statement of financial position
non-current assets (furniture and fittings, fixed deposit investment)
current assets
equity
non-current liabilities (long term borrowings)
current liabilities
what is included in cost of sales
costs to bring the item to the location and conidition where ready for the purpose intended
does not include costs incurred after the sale
Net realisable value
The price at which unsold inventory could be sold less expenses of selling them
non-current assets in SoFP
non-current assets (furniture and fittings, fixed deposit investment, equipment, vehicles)
non-current liabilities SoFP
(long term borrowings)
SoFP where to put Allowance for Doubtful Debts
Subtract from Trade Receivables
investment on SoFP
non current asset
