The trial balance and the accounting equation Flashcards
What is a trial balance?
A list of accounts in an accounting system recorded as a debit or credit balance meaning that the accounts have been balanced ahead of the trial balance making the process faster and more efficient as errors would have already been picked up earlier
how would we know if an account is a debit or credit balance?
the figures brought down in each account will show this but you will also will be expected to know, example of a trial balance on pg. 1
what is inventory?
Inventory is the stock of goods ready to be sold, this figure only changes when goods are counted at the end of a period during a stocktake.
what is equity?
the total amount of money invested into the business by the owner, either the owners own private funds or the profit from the business from previous years
what are drawings?
money taken from the business by the owner as owners do not receive salaries.
it can be assumed which accounts are credit or debit, what would a cash account be?
debit as you cannot spend more cash than what you have
it can be assumed which accounts are credit or debit, what would a loan account be?
a credit as we owe the bank, the bank does not owe us
PEARLS is a useful way to remember which accounts will always be debits and credits, what does PEARLS stand for?
debits = PEA
Purchases
Expenses, anything we pay to keep the business running
Assets, expensive items belonging to the business like cars, stock and machinery, as well as the receivables ledger as we are owed and any cash on premises or in the bank
credits = RLS
Revenue, opposite of expenses money we receive from renting an office or profit from selling a car
Liabilities, opposite of an asset anything we owe, bank loans and the payables ledger, overdrawn at the bank, owe HMRC and capital
Sales, anything in our trade
we know that a reduction in anything will be on the opposite side, give an example
if sales are a credit then sales returns will be a debit
if purchases are a debit then purchase returns will be a credit etc
what type of account will capital be under and why?
capital will always be a credit because in accounting the business is separate from the owner so if the owner invests into their own business the business will now owe the owner as it is a separate entity from the owner, if money is owed to the owner then it is considered a liability and liabilities are always credits
what type of account will drawings be and why?
drawings is what is taken from the business by the owner meaning the liability is reduced as what the business is reduced meaning the drawings are a debit
we know that the trial balance means the debits must equal the credits but what are the points to look at if it does not balance
- has the trial balance total been calculated properly
- has the balance on each account been correctly copied
- have all accounts been included
- find out how much the totals differ by, it could be that the account has been placed in the credits column when it is a debit account (see pg.3)
why is knowing the difference between revenue and capital expenditure important to understand the true profitability of a business?
for example
if the business premises was bought for £350,000 and the business makes £200,000 profit but the next year the business makes £50,000 the second year would be seen as the business making an actual profit
the first year when the business generated 200k was still short compared to the capital expenditure as the business cost 350k so it was not considered profit
however, the second year the business made no capital expenditures meaning they made a 50k profit
what is a non current asset?
this is a capital expense, this includes items like such as land and building, motor vehicles, furniture, office equipment and computer, fixture and fittings etc, anything that is brought into the business that’ll be used over a a number of years, each non-current asset will need a separate account like ‘motor vehicles account’
list things that are classed as capital expenditure (BEDIL)
- buying a non-current asset
- expenditure for bringing in the non current asset to a state where it can be used in the business like installation and fixing costs
- delivery costs of the non-current assets
- improvement of fixed assets not repairs (e.g. a new shop window if there wasn’t already one before not to replace a broken one)
- legal costs of buying land/ property
