Week 14 - The Double-entry system, Trial balance, Accruals and Prepayments

Question 1

Principal users of financial information
4

Answer 1

Managers - need info to make decisions
Investors - Concerned with the risk
Suppliers - will owed amounts be paid
Customers - will warranty obligations be honoured

Question 2

4 Statements

Answer 2

Statement of financial position: Balance Sheet
Statement of Comprehensive Income: Income statement
Statement of Cash Flows
Statement of changes in equities

Question 3

Income Statement Format

Answer 3

Revenue
Cost of Goods Sold
Gives us Gross Profit
Operating expenses
Gives Operating Income / EBITDA
Subtract other expenses like tax, interest to get
Net Income

Question 4

Double Entry

Answer 4

Every transaction generates two entries
One debit (increase in asset, decrease in liability or equity, or expense incurrence)
and one Credit (decrease in asset, increase in liability or equity, generation of income)

Question 5

T-Account

Answer 5

Created for each type of asset, liability or equity . They look like:
Account Name
Debits | Credits

e.g.
If company buys £1m equipment

Asset of equipment increases by £1m (debit entry), but cash decreases by £1m (credit entry)

Question 6

Trial Balance and Example

Answer 6

Way of checking whether calculations are correct and everything balances. You make a T-Account for Bank Account and Equity, and then each individual expense e.g. if you put £30,000 in bank account, put £30k in Credit T-Account of Bank account and £30,000 in credit side of Equity T-Account.
Buy £20k equipment, put £20k in credit side of bank account and £20k in equipment T-ACCOUNT.
Make £1k in sales, put £1k in debit side of bank account t-account and £1k in Revenue Credit.

There must be a credit and debit input for every single transaction.
They should balance at the end - do this by making a table with debit as one heading and credit on other. Rows named after each t-account.

Look at Week 14 slides, pages 50 onward for examples

Question 7

Cash v Accrual Accounting

and Accrual Formula

Answer 7

Cash Accounting - Income recorded when cash is recieved, expenses recorded when cash is paid

Accrual Based Accounting - Income and Expenses attributed to the period they relate to, regardless of cash flow

Accruals = Earnings - Cash flows

Question 8

What is the opposite double entry for both Inventory and Purchases

Answer 8

Cost of Sales

So if you are doing T Accounts and need to debit Inventory, you should credit Cost of Sales