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(Yr. 1) Accounting > (Yr. 1) Introduction to Financial Accounting > Flashcards

(Yr. 1) Introduction to Financial Accounting Flashcards

1
Q

What are the Four Types of Business?

A

1) Sole Traders
2) Partnerships
3) Limited Companies
4) Public Limited Companies

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2
Q

What two businesses are unincorporated?

A
  1. Sole Trader
  2. Partnership
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3
Q

What two businesses are incorporated ?

A
  1. Limited Companies
  2. Public Limited Companies
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4
Q

What are the Key Features of a Sole Trader?
(6 Points)

A
  1. One Person Owns and Manages the Business
  2. Can Have Employees
  3. Can use owners name or a trading name
  4. Financed by owners capital introduced to fund the business
  5. All profit and lossess to the proprietor
  6. Unlimited Liability
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5
Q

What are the main features of a Partnership? Suits
(7 Points)

A
  1. A Business owned by several individuals
  2. A group of ‘sole traders’ working together with a common goal
  3. Examples include accountants, solicitors etc
  4. Allows business to grow beyond the capacity of one individual and the combination of different strengths
  5. Each Partner puts capital into the business the amount per partner is decided in the partnership agreement
  6. The Profits and Losses of the Partnership are detailed in the partnership agreement
  7. Unlimited liability for partners
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6
Q

What are the main features of an incorporated business?
(3 Points)

A
  1. It is regarded as a separate legal entity
    - This means that the shareholders have limited liability
    -The liability is only equal to the nominal amount of the shares to cover any debts of the business
  2. This differs from sole traders and partnerships who have full liability for their personal resources as they aren’t regarded as a separate legal entity
  3. E.g. A company
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7
Q

What are the main features of a Private Limited Company (Ltd) ?
(4 Points)

A
  1. A private limited company must include either ‘Ltd’ or ‘limited’ in their business name
  2. Shareholders tend to be close as the shares in a private company cant be publically traded
  3. Companies will have to file an annual report and accounts to the registrar of companies
  4. The reporting requirements are not as rigorous as public companies so a degree of confidentiality is possible
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8
Q

What are the main features of Public Limited Companies?
(5 Points)

A
  1. These companies must include the words ‘public limited company or ‘plc’ in their name
  2. Shares can be sold to the public and traded on the stock exchange thus the term ‘go public’
  3. Stock exchanges have strict reporting requirements that companies must comply to
  4. The directors of the company are responsible for managing the business but the shareholders are the owners, this can lead to potential conflict between the two groups
  5. Share issues have a nominal value but are often traded for a higher value than face value this difference between the nominal value and market price is known as the share premium
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8
Q

What is the main advantage of a Sole Trader?

A

Simple Reporting Process

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9
Q

What is the main disadvantage of a Sole Trader?

A

Personal Liability and a Limited capacity to one individual

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10
Q

What is the main advantage of a
Partnership?

A

Potential for a greater scope than one individual

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11
Q

What is the main disadvantage of a Partnership?

A

Personal Liability

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12
Q

What is the main advantage of a Limited Company?

A

Limited Liability

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13
Q

What is the main disadvantage of a Limited Company?

A

Requirements of the Registrar of Companies

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14
Q

What is the main advantage of a Public Limited Company?

A

Limited Liability

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15
Q

What are the two main disadvantages of a Public Limited Company?

A
  1. Requirement of Registrar of Companies
  2. Stock Exchange Requirments
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16
Q

What are Subsidiaries?

A

Companies that can invest in other companies can become subsidiary companies if they are controlled

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16
Q

What is a joint venture?

A

A Business arrangement where two or more parties agree to pool their resources towards achieving a particular risk

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17
Q

Which 3 Accounting Terms appear in the Statement of Financial Position

A
  1. Assets
  2. Liabilities
  3. Equity
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18
Q

What 3 Accounting Terms appear in the Statement of Financial Position

A
  1. Assets (Least to most liquid)
  2. Capital add Profit Less Drawings
  3. Liabilities (Least to most liquid)
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19
Q

What is it meant by going concern?

A
  1. Going Concern is the assumption that an entity will continue in operation for the foreseeable future
  2. It assumes the company is not planning on liquidation
  3. Assets are valued at their historical cost as opposed to their scrap value
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20
Q

What is it meant by Accurals?

A
  1. An accrual allocates income and expenses to the periods to which they relate rather than when the cash changes hands
    -When income is earned (not when the invoice is settled)
    -When expenses are incurred ( regardless of when the bill is paid)
  2. It recognises past payments and advance payments through accounting adjustments
  3. Accounting adjustments can involve the recognition of income accrued expenses, deferred income and prepayments
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21
Q

What is it meant by Earned? (revenue realisation concept)

A
  1. A Sale is deemed to have taken place at the point where the goods are delivered or the services provided and not when the proceeds of sale are received (e.g. the payment for the good or service)
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22
Q

What is it meant by Incurred?

A
  1. Goods and services are deemed to have been purchased on the date that they were received and not when the payment is made

Example. Pre-Paid Expenses

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23
Q

What is it meant by a Cash Transaction?

A

A cash transaction is one where goods and services are paid for in cash or by cheque when they are received or delivered

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24
Q

What is it meant by a Credit Transaction?

A

A Credit transaction is one when payment is made or received some times after delivery (normally in one instalment after a few weeks)

Example. Klarna

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25
Q

What is meant by a Trade Discount?

A

A Trade Discount is a discount given by one trader to another and is deducted from the invoice indicating the amount the buyer is charged for the goods

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26
Q

What is it meant by a Cash Discount?

A

A Cash Discount is a reduction in the amount that the customer has to pay within a given time period by the seller at the time of sale (e.g. 5% if paid within 30 days)

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27
Q

Define an Invoice.

A

Definition: An invoice is a document sent by the seller to inform the buyer how much is owed for the goods supplied

(It is NOT a demand for payment)

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28
Q

Explain the Contents of an Invoice.

A
  1. Name and address of buyer and Seller
  2. Date of Invoice
  3. Address to which the good were delivered
  4. Buyer’s order number
  5. Quantity of goods supplied
  6. Details of goods supplied
  7. Price per unit of each of the goods
  8. Value of the invoice prior to VAT
  9. When the payment should be made
  10. The seller’s terms of trade
  11. The trade and cash discount
  12. The sellers terms of trade
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29
Q

What is a Debit Note?

A

A debit note is sent by the seller if the buyer has been undercharged on the invoice the layout is the same as an invoice but it instead shows the details of the undercharge

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30
Q

What is a Credit Note?

A

A credit note may be sent by the seller for multiple reasons
-A Buyer may have returned goods if they were not ordered, if the wrong type quantity or quality was ordered
-The Seller has overcharged the buyer on an invoice maybe due to an error on the invoice

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31
Q

What are books of prime entry?

A
  1. Books of prime entry as designed to show more detail relating to each transaction that appears in the ledger
  2. They also facilitate making entries in the ledger in that the transaction of the same business can be posted periodically rather than at one time
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32
Q

What are the nine Books of entry?

A
  1. Sales Day book
  2. Purchases day book
  3. Sales return book
  4. Purchases returns day book
  5. Petty Cash book
  6. Cash Book
  7. Bills receivable book
  8. Bills payable book
  9. The Journal
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33
Q

What is the Accounting Equation?

A

Assets - Liabilities = Owners Capital

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34
Q

What is revenue expenditure?

A

Revenue Expenditure is any money spent by a business that covers short term expenses

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35
Q

What is Capital expenditure?

A

Capital Expenditure is expected to generate income over more than one accounting period and so appears as an asset in the statement of financial position

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36
Q

What is the Sales day book for?

A

Receivables

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37
Q

What is the Purchase day book?

A

Payables

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38
Q

What is the sales returns day book for?

A

Returns Inwards

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39
Q

What is the Purchases returns day book?

A

Returns Outwards

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40
Q

What is the Petty cash book?

A

This book records the cash received and cash paid, this is written up from receipts its normally for smaller transactions

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41
Q

What is the Cash Book for?

A

Cash and bank transactions

42
Q

What is the journal?

A

This book contains any transactions that are not included in any of the books of prime entry

43
Q

In the income statement what is debited and what is credited?

A

Debit = Expenses
Credit = Sales

44
Q

In the statement of financial position, what is debited and credited?

A

Debit = Assets
Credit = Liabilities / Capital

45
Q

What is a Trial Balance?
(2 Points)

A

1) A Trial balance is a list of balances in the ledger and the end of the accounting period, divided between those accounts with debit balances and those with credit balances

2) Every transaction in the ledger consists of a debit and credit entry the total of these accounts in the trial balance with debit balances equalling the credit balances

46
Q

What is the function of the Trial Balance?

A

1) The Trial balance is a method of internal control that provides a check on the mathematical accuracy of the ledger and that each transaction has been entered on both sides of the ledger

2) It allows for the discovery of potential issues

3) The Trial balance is used in the preparation of financial statements

47
Q

Can a trial balance agree but still contain errors? (Explain Why?)

A

A Trial balance can agree and still contain errors in the ledger for instance the amount entered on the correct side but in the wrong side or the wrong ammount entered on both sides

48
Q

What does DEAD stand for?

A

-Debit
-Expenses
-Assets
-Drawings

49
Q

What does CLIC stand for?

A

-Credit
-Liabilities
-Income
-Capital

50
Q

According to double entry when there are sales what is debited and what is credited?

A

Debit = Bank/Cash
Credit = Sales

51
Q

According to double entry when there are Purchases what is debited and what is credited?

A

Debit = Purchases
Credit = Bank/Cash

52
Q

What two places are receivables recorded in?

A

1) Memorandum: Receivables Ledger - Individual customer balances

2) Nominal Ledger: Receivables ledger control account - Total receivables

53
Q

What two places are payables recorded in?

A

1) Memorandum Payables ledger - Individual Supplier Balances

2) Nominal Ledger Payables ledger account control account - Total Payables

54
Q

What two types of Discounts are there?

A

1) Trade Discounts

2) Settlement Discounts

55
Q

What is a Trade Discount?

A

A Trade discount is a discount that is made at the time of the sale, where there is an incentive to buy

56
Q

What is a Settlement Discount?

A

A Settlement discount is a discount that is offered but not necessarily taken, it provides an incentive to pay early

Example: A 5% discount if you pay within 14 days

57
Q

What is the Accounting Equation?

A

Assets = Capital + Liabilities

58
Q

What are the six main characteristics of the Statement of Profit and Loss?

A

1) 3 W’s Who, What, When
2) Sales
3) Less cost of Sales
4) Profit
5) Income
6) Expenses

59
Q

What are the main characteristics of the Statement of Financial Position?

A

1) Its a Snapshot As at the date its produced
2) Use of the accounting equation
3) Assets = Capital + Liabilities
4) Non-current & current assets
5) Assets are ordered in order of least liquid first

60
Q

What is the simple definition of VAT?

A

VAT is the tax charged on the supply of most goods and services

-It is in addition to the price charged for goods and services by the seller

61
Q

What is the underlying concept of VAT?

A

That tax is paid by the ULTIMATE CONSUMER

62
Q

What is the difference between inputs and outputs?

A

Inputs relate to good coming into the business e.g. purchases

Outputs relate to goods going OUT of the business e.g. sales

63
Q

What is the Petty cash book used for?
(Petty = Small)

A

1) The Petty cash book is used to record the receipt and payment of small amounts of cash

2) It is written up from receipts and petty cash vouchers

3) It replaces the cash account in the ledger

4) Its both a book of prime entry and part of the double entry system

64
Q

What is the Columnar Petty Cash book?

A

1) The book contains columns on the credit side each of which relate to a certain type of expenditure
2) At the end of each month the total of the each analysis column is debited to the relevant ledger account
3) This Allows for bulk posting of transactions to the ledger

Week 5 (2)

65
Q

How does the Imprest System work?

A

1) At the start of each period (week or month) a cashier has a fixed ammount of cash known as a ‘float’
2) At the end of the period the petty cahsier is reimubursed the ammount spent during the period which will make the float up to its original ammount
3) The size of the float is determined by reference to the normal level of petty cash expenditure during the period

66
Q

What are the two types of Petty cash book?

A

1) Straight-forward system (reimbursed when needed)
2) Imprest (fixed float reimbursed periodically)

66
Q

What are the advantages of the Imprest system ?

A

1) The imprest system facilitates control of the petty cash expenditure as the cashier cant spend more than the value of the float

2) The entries can be kept up to date as the expenditure is not reimbursed untul the book is written up and the total expenditure ammount in known

3) It discourages the practices of loans from petty cash since these would have to be accounted for at the end of the period

67
Q

Week 6 (1)

What are bad debts?

A

Bad debts are those for which you no longer expect to receive payment and are definitely irrecoverable and thus should be written of to the profit and loss account as Bad Debt

68
Q

How do you write of a Bad Debt?

A

Debit: bad debts (shown on the profit and loss debit income as an expense)
Credit: Sales Ledger Account

69
Q

What is a doubtful debt?

A

1) Doubtful debts are debts that are possibly irrecoverable, thus an allowance should be set up

2) A general provision for bad debts can be made usually by utilizing a percentage of total ammounts receivable

70
Q

What are the two types of Allowance?

A

1) Specific: an individual doubtful debt
2) General: After taking into account both:
-Bad Debts
-Specific doubtful debts

71
Q

What are the three ledgers that accounting records are split into?

A

1) Impersonal (Nominal or Ledger)
2) Receivables Ledger
3) Payables Ledger

Week 6 Lecture 1 Slide 15

72
Q

Explain the function of control accounts?

A

The control accounts record the summary of the data for the month

Sumrary of transactions in sales and purchases ledgder for double entry

73
Q

Explain the process of posting a sales invoice

A

1) Sales Invoice is posted
2) Posted into Receivables Day Book
3) Split into either the Nominal Ledger and the Named Accounts

Slide 17 and 18 Re-watch lecture

74
Q

Explain how a contra arises?

A

1) A contra occurs where we use a company as both a supplier and a customer
2) The ammount that we owe to them will be written against what they owe to us
3) A contra appears as a credit on the trade receivables control account and as an adjustment in their ledger account

75
Q

Explain how a credit balance can occur?

A

1) Credit balances occurs when a credit balance has risen on a receivables account
Example 1: Goods are sold then returned and the supplier provides a customer with a credit note along with an additional ammont included as good will
Example 2: Credit Balances can also occur where there is a timining difference between a payment being received before the invoice had been issued

76
Q

Explain the process of posting a purchase invoice?

Think of the steps top to bottom in your head

A

1) The purchase invoice is posted
2) The invoiced is posted in the Payables Day Book
3) From their they are either posted in the Nominal ledger or in named accounts

77
Q

Where is the Payables Ledger summarised?

A

The payables ledger is summarised in the purchase or trade payables or trade payables control accounts

78
Q

Slide 30 Week 6 Lecture 1

A
79
Q

Explain the nature of Non-Current Assets?

4 Points

A

1) Items that are not intentionally bought for resale but instead for the production and distribution of those goods normally sold by the business
2) They are normally durable goods that last for several years and businesses normally keep the goods fore more than one year
3) A Non-Current asset can also be expected to generate revenue over a number of future years of at least a material ammount
4) Non-Current Assets are also known as Capital Expenditure all other costs are known as revenue expenditure

80
Q

How long do a company keep a Non-Current Asset for?

A

More than one year

81
Q

What are non-current assets also referred to as?

A

Capital Expenditure

82
Q

What are all other costs other than Capital expenditure called?

A

Revenue Expenditure

83
Q

Explain how to calculate historial costs?

A

Historial cost less the aggregate / total depreication from the date of acquisition to date of statement of financial position

Historial Cost = Cost of getting asset and getting it to work minus VAT

Known as Net book value or net carrying amount

84
Q

What are the three classifications of Non-Current Assets?

A

1) Tangible
2) Intangible
3) Investments

Characteristic explanation on following cards

85
Q

Explain Tangible in terms of Classification of Non-Current Assets?

A

-Assets that have physical substance and are used in production or supplying goods or services
-E.g. Land & Buildings macinery, motor vehicles, office equipment etc

86
Q

Explain Intagible in terms of Classification of Non-Current Assets?

A

-Non-Financial assets that dont have a physical substance but are identifiable and controlled by the entity through custody or legal rights
-E.g. Goodwill, patents, trade marks

87
Q

Explain Investments in terms of Classification of Non-Current Assets?

A

-Assets held on a long-term basis (> 1 year)
-E.g. Subsidiaries joint ventures, shares etc

88
Q

What is Depreciation?

A

1) Depreciation is the allocation of the cost of a non-current asset over the accounting periods

89
Q

What is Depreciation not?

A

1) A means of revaluing non-current assets
2) The creation of a provision for the replacement of non-current assets

90
Q

What are the 4 main determinants of depreciation?

A

1) Historial cost (or valuation)
2) Length of assets expected useful economic life to the business
3) Estimated residual value of the asset at the end of its useful economic life
4) The method (Straight Line Method or Diminishing/Reducing Balance Method)

91
Q

What is Useful life?

A

1) The period over which an asset is expected to be available for use by an entity

92
Q

What are the three types of depreciation?

A

1) The Straight Line Fixed Instalment Method (SLM)
2) The Reducing Balance Method (RBM)
3) The Sum of the Years Digits Method (SYD)

93
Q

What are the two ways to calculate depreciation using the Straight Line Method (SLM)?

A

1) Cost-Residual Value/Useful economic life (in years)

2) Given Percantage rate * Historial Cost
(-This gives depreciation per year)

94
Q

What are the arguments for the Straight Line Method?

A

For:
1) Easy to understand and simple to calculate
2) Useful when an asset is utilised the same each year

95
Q

What are the arguments against SLM?

A

1) It might not give an accurate measure of the loss in value or reduction in useful life

-Example large fall in the price of new cars in the first year of ownership

96
Q

How do you caluclate the Sum of the years Method?

A

Years of remaining useful life at the start of the year (Yrs)
/
Sum of the years digits * Depreciable ammount

-This gives a decreasing annual amount of depreciation over the assets useful life

97
Q

What is Partial Year Depreication?

A

1) When a non-current asset is purchased or sold part way through an accounting year

98
Q

What are Accruals?

A

Accruals are expenses incurred by the business during the accounting period but not yet paid for

Shown in the statement of financial position under “Current liabilities”

Reduce ‘specifc expense’ in the statement of P&L

99
Q

What are Prepayments?

A

Prepayments arise when expenses are paid for before they have been used

Shown in the statement of financial position under Current Assets

Reduce ‘specific expense’ in Statement of P&L

100
Q

What is the advanced accounting equation?

A

Assets = Liabilities + Share Capital + Retained Earnings

101
Q

What is the layout of the Statement of Financial position?

A

Remember this
-3 W’s ?
-Who (Company Name), What, When (Date of SOFP)
1) Assets go from least to most liquid
a. Non-Current Assets
b. Current Assets
i. Inventory
ii. Receivables
iii. Cash at bank + Cash in Hand

2) Capital and Liabilities
a. Opening Capital (Normally Stated at the top of the question)
b. Add Capital Introduced
c. Add net Profit
d. Less Drawings

3) Liabilities (Same as Assets least liquid 1st)
a. Non-Current Liabilities
b. Current Liabilities
i) Trade Payables
**

102
Q

What is the layout of the Statement of Profit and Loss (Trading Account)

A

Remember this
-3 W’s ?
-Who What When
1) Turnover (Sales)

2) Less Costs of Sales
a. Opening Inventory
b. Add Purchases
c. Add Carriage Inwards
d. Less Closing Inventory

3) Gross Profit

4) Add Sundry Income

5) Less Expenses

6) Total Expenses

7) Net Profit = Gross Profit - Expenses
a. This Net Profit figure must then be inputted into the Statement of Financial Position

103
Q

What should you do first the Statement of Profit and Loss or the Statement of Financial Position?

A

Do the Statement of Profit and Loss first as the Net profit figure is needed in the Statement of Financial Position

104
Q

How do you write of a Doubtful debt?

A

Debit: Doubtful Debt Expense (S P/L)
Credit: Allowance for Doubtful Debt (SOFP)

(Yr. 1) Accounting (3 decks)

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