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.
