Flashcards in A Deck (20):
What are the key questions investors ask?
Is the business making profit?
Does it have enough funds to pay debts?
What does a set of accounts consist of?
Two principal statements accompanied by detailed notes
What are the two principal statements in a set of accounts?
Statement of financial position
For accounting purposes, what are the three types of business and how do they differ?
Sole Traders - owner = manager. Legally responsible. Non regulated accounts.
Partnership - Owners = managers. Produce special partnership accounts. Legally responsible.
Company - Not owned by managers of business (directors) but owned by shareholders who buy shares. Shareholders not responsible - company is own legal entity. Company accounts are heavily regulated by company law and accounting standards.
Define bookkeeping? What is its purpose?
Book keeping is the recording of a business's commercial transactions. The purpose of this it provide a summary of transactions to allow production of accounts.
What do we mean by the position in SOFP?
The SOFP considers what the business owns (or assets) and what the business owes (or liabilities) - this gives its position
What is an asset? Define the two types of assets?
Assets are defined things which the business owns.
Non current assets - "assets acquired for use within a business over more than one year with a view to earning profits but not for resale" such as land, office equipment, bulldings, locomotives, computers, cars, patents
Current assets - " assets acquired for conversion into cash in the ordinary course of business" - pass through as part of normal trading process. Includes cash and inventories.
What is a receivable?
These occur when we sell goods to customers on credit. The money is received depending on the terms of the credit agreement.
Define liability and the the two types of liabilities?
A liability is an amount owed by the business - an obligation to pay money at a future date
Non current liability - amounts are owed by business but are payable in more than one year and the date of the SOFP. Mostly long term bank loans
Current liabilities - simply a short term liability - amount owed by business payable within one year. Such as trade payables (purchasing on credit and owing supplies) or bank overdrafts.
What is the business entity concept?
Applies to sole trader businesses. From an accounting perspective the owner and manager are different people. So if the business owner puts anything into the business, the business owes this back to the owner. The amount the business owes to the owner is known as capital
Capital represents the total amount which the business owes to its owner of proprietor. The amount of capitol needs to be shown on the SOFP.
How is capital calculated?
Opening capital + Capital injections +/- profits/losses - drawings = capital owed to proprietor
Opening capital - the amount which the proprietor has invested in the business to the start of the year.
Capital injections - any money the proprietor puts into the business during the year.
Profits- funds generated by the business
Losses - funds lost by the business
Drawings - any amounts taken out of the business by the owner (including his salary)
How is the SOFP laid out?
Refer to booklet page 9
What is the accounting equation?
Total assets = Capital + Total liabilities
Define the income statement?
A summary of the results of a business's transactions for a period ending on the date of the statement of financial position. It summarises sales made and expenses incurred over a period of time. Enables us to establish whether a profit or a loss has been made
What should the format of a Income statement be?
Less cost of sales
Opening inventories on 1 Jan 20XX
Closing inventories on 31 Dec 20XX
Lighting and heating
Revenue includes sales made for cash and sales made on credit. (Turnover from sale of goods)
How to calculate cost of sales?
The way to find out cost of the goods actually sold is to take:
the cost of goods in stock at the beginning (opening inventories)
ADD the cost of goods bought during the period (purchases)
MINUS the cost of goods in stock at the end of the period (closing inventories)
So it takes costs of goods available for sale less the cost of goods which wern't sold which gives the cost of the goods that were actually sold. n
Define gross profit
Revenue less cost of sales. It shows how successful the main activity of the business has been.