Third 1-3 Flashcards
When starting a business how are assets, liabilities and capital double-entry book accounts opened?
They are listed in the journal with a suitable narrative and the date.
What is bad debt?
Debt that cannot be converted into payment.
How are bad debts entered into the books?
Through journal postings.
What is the implication of a bankrupt debtor (with bad debt owed) being VAT registered?
The business may then be able to claim bad debt relief.
What is bad debt relief?
The VAT element of the bad debt can be reclaimed from HMRC if the debt is at least 6 months old and has been recorded in the books as bad debt.
What is a suspense account?
It’s a General Ledger account into which Postings of temporary “balancing” entries made to the trial Balance are recorded.
When should a suspense account be used?
It should be opened only when all else as failed and the Trial Balance still does not balance; as a last resort.
What happens when the error that led to the opening of the suspense account is rectified?
The journal is used to clear the suspense account.
List the steps in using a suspense account.
Balance the Trial Balance by recording the difference in a suspense account;
Open a General Ledger Suspense account and post to it as shown in the TB;
Prepare the journal entries to correct the book-keeping errors and clear the suspense account;
Post the Journal entries into the GL to clear the suspense account;
Re-draft Trial Balance following correction.
What is the extended Trial Balance?
A form of worksheet used to provide the link between the preliminary trial Balance and the financial statements prepared at the end of the accounting period i.e. the profit and loss account and the balance sheet account.
What is a typical layout of the extended Trial Balance?
Account names;
Trial Balance;
Adjustments;
Profit and Loss;
Balance Sheet.
What is the Adjustments column in the ETB mainly used for?
To record year end adjustments.
What are some typical (standard) adjustments carried out at the end of the accounting year?
Bad debts now to be written off;
Depreciation;
Accruals and Pre-payments;
Stock.
What is Matching?
The term used for comparing income to expenditure.
What are the two types of income?
Capital Income and Revenue Income.
What is capital income?
Income borrowed by the business and invested in the business for the long term. It includes capital invested by the owner or external finance.
What is revenue income?
Income earned by the business from either trading or non-trading activities e.g. sales, bank interest received, rental income from sub-letting premisses etc…
What are the two types of expenditure?
Capital expenditure and Revenue expenditure.
What is capital expenditure?
Expenditure with a long-term effect in the profit-making capacity of the business.
Mainly includes acquisition of fixed assets and costs related with installation, modification and replacement of such assets.
What is Revenue Expenditure? Which financial statement does it belong to?
Expenditure with a short-term effect months profit-making capacity of the business.
Mainly beneficial for one accounting period only.
Includes purchase of stock, rent, rates, insurance, repairs to fixed assets, wages and salaries, utility bills etc.
This type of expenditure will form part of the Profit and Loss account in the ETB.
What is the total expenditure made up of?
All the revenue expenditure plus a portion of the capital expenditure consumed.
What is depreciation?
The portion of the cost of an asset consumed during an accounting period.
What is the straight line method of calculating depreciation?
Cost of Asset/Useful Life of Asset.
Exemple: £5200/5years= £1040 per year
What are accruals?
Items of expenditure incurred in an accounting period for which, at the time the accounts are being prepared, no invoice has been received i.e. an invoice that should have been paid but wasn’t.
What are pre-payments?
Expenses paid by a business in an accounting period which relate, in part or in full, to the following accounting period.
What is te cost of sales?
The value of the stock consumed by a business during an accounting period.
In adjustments, what double-entry activity is made for Depreciation charge for the year?
Dr account: depreciation (charge a/c)
Cr account Depreciation (Provision)
In adjustments, what double-entry activity is made for Closing Stock?
Dr account: Stock
Cr account: Stock
In adjustments, what double-entry activity is made for Bad Debts Written off?
Dr account: Bad debts
Cr account: sales Ledger Control.
In adjustments, what double-entry activity is made for Transfer of assets for disposal?
Dr account: Disposal of fixed assets
Cr account: asset account representing the type of asset being disposed of e.g. Motor Vehicle
What is the Depreciation Charge account?
Used to record the charge (cost) to the business for depreciation during the current account period only.
It records the value of the asset consumed during the one year being considered.
It is an expense account.
What is the Depreciation Provision account?
Records the total of all of the depreciation charged for the use of an asset (for all accounting periods since being acquired) against the sales revenue produced since the acquisition of that asset.
It is carried forward from one accounting period to the next.
Where does the net balance of income and expenditure accounts go to in the ETB?
The profit and Loss columns
Where does the net balance of assets and liabilities accounts go to in the ETB?
The balance sheet columns.
When assets are sold, what is the procedure to be followed?
First, all traces of the assets must be removed from the accounts;
Second, there must be an analysis of whether it was sold for more or less than it cost.
This is done with a Disposal of fixed assets Ledger account
Asset/liability or Expense/income:
Capital
Liabilities
Asset/liability or Expense/income:
Drawings
Decrease in capital - decrease in LIABILITIES.
Asset/liability or Expense/income:
Motor vehicles
Assets
Asset/liability or Expense/income:
“Assets” depreciation (charge a/c)
Expenditure
In ETB profit and Loss columns, which represents income and which represents expenditure?
The Debit column represents expenditure and the Credit column represents income.
How should the profit or loss be introduced into the balance sheet section of the ETB?
As a liability owed by the business. If it is a profit than the amount is owed to the owner; If it is a loss, the amount is owed to creditors.
Asset/liability or Expense/income:
“Assets” provision for depreciation
Reduction in asset values.
Asset/liability or Expense/income:
Control accounts
Assets or liabilities
Asset/liability or Expense/income:
Bank, cash
Assets
Asset/liability or Expense/income:
VAT, Paye/NIC
Liabilities
Asset/liability or Expense/income:
Disposal of fixed assets
Sales (revenue or expenditure)
Asset/liability or Expense/income:
Sales, purchases, over-heads, wages, sundry
Expense/income(sales)
Asset/liability or Expense/income:
Bad debts
Expense
Asset/liability or Expense/income:
Opening stock
Expense/income
Asset/liability or Expense/income:
Closing stock
Asset on the balance sheet
Income on the profit and Loss (decrease in expenditure - CR side)
Asset/liability or Expense/income:
Accruals
Liability
Asset/liability or Expense/income:
Prepayments
Asset
