Accounting Principles and Procedures

Question 1

What is a balance sheet?

Answer 1

A balance sheet is a snapshot of a company’s financial position at a point in time. It shows its total assets versus total liabilities.

Question 2

What is a profit and loss statement?

Answer 2

A profit and loss statement is the change in a company’s accounts over a period of time. It shows how much money a company is making or losing at a point in time. This shows revenue versus expense.

Question 3

What is a cashflow?

Answer 3

Cashflow is the liquidity of a company. It shows the movements of money in and out over a period of time. This can be actual or forecast.

Question 4

What is the difference between a profit and loss statement and a cashflow?

Answer 4

Profit and loss measures profitability, whereas cashflow measures liquidity.

Question 5

What are the UK requirements for firms submitting accounts?

Answer 5

Firms have a responsibility to submit annual accounts, including a profit and loss statement, cash flow and balance sheet as set out by Company Law.

Question 6

What is Company Law?

Answer 6

The contents of the Companies Act 2006.

Question 7

What is the Companies Act 2006?

Answer 7

A comprehensive code of Law for Companies operating in the UK.

• Directors duties
• Formation and dissolving of a company
• Submit annual accounts to Companies House.

Question 8

What are some of the Director’s duties under the Companies Act 2006?

Answer 8

• To act within the company’s constitution and to only exercise powers for a proper purpose
• Exercise reasonable care, skill and diligence.
• Avoid conflicts of interest.
• Exercise independent judgement.

Question 9

What is the difference between Companies House and HMRC?

Answer 9

Companies House is responsible for registering and dissolving companies, while HMRC is responsible for collecting taxes and enforcing tax laws.

Question 10

What are the standards for financial reporting?

Answer 10

The Financial Reporting Standards are set out by the Financial Reporting Council.

Question 11

What should annual accounts contain?

Answer 11

• Director’s report
• Independent auditors report
• Cash flow, profit and loss statement, balance sheet.
• Notes on the accounts

Question 12

What is the difference between management accounts and financial accounts?

Answer 12

• Management accounts are for internal use, while financial accounts are for external use
• Especially the same information, but the audience and intended use is different. Financial focused on compliance, whereas management may look at KPIs, and ways in which the company can internally focus it’s operations to meet them.

Question 13

What is typically included within a director’s report?

Answer 13

• Overview
• Financial performance
• Governance
• Sustainability
• Targets and objectives etc.