AAT Level 2 Flashcards
Goods and services can be sold either for immediate payment or for payment at a later date.
What are the two payment types known as?
Cash Sales
Cash sales can involve immediate payment by notes and coins, credit card or debit card.
Credit Sales
For payment at a later date.
What is the definition of a Partnership?
An organization owned by two or more people working together to make a profit.
What is the benefit of a Partnership?
As there are more owners than just a sole trader, there is a greater availability of finance for the company.
What is the definition of a company?
A company Is an entity in it’s own right, recognized in law, which may own assets and incur liabilities in it’s own name.
The accounting of a company must meet certain minimum obligations imposed by legislation via company law and other regulations.
Define Management Accounts
Prepared on a monthly basis.
Provides timely financial and statistical information to Business Managers.
Aids managers to run the business more effectively.
Informs day-to-day and short-term decisions.
Define Financial Accounts
Prepared annually.
Mainly for the benefit of people outside the management of the business like owners, shareholders, HMRC, banks etc.
They are the final product of the accounting system of a business.
What is the objective of financial accounting?
To provide financial information about a business.
What are the two principal financial statements?
The Statement of Profit and Loss
The Statement Of Financial Position
What is the objective of a Statement of Profit and Loss?
INCOME AND EXPENSES
To provide a summary of the business’s transactions (income and expenses) for a given period.
What is the objective of a Statement of Financial Position?
NB Formerly called a Balance Sheet
ASSETS AND LIABILITIES
To provide a statement of the assets and liabilities of a business at a given date (the end of the period covered by the Statement of Profit and Loss)
What are the first two entries on a Statement of Profit and Loss?
Define them too.
Sales Revenue
(Income generated from the trading activities of the business)
Less
Cost of Sales
(Cost of buying or producing goods for resale)
How is Gross Profit defined?
The profit remaining after the Cost of Sales have been deducted from the Sales Revenue.
What is Sundry Income?
Other types of income not generated by the primary trading activities of the business.
What are Expenses defined as?
The day to day running costs of the business.
What is Net Profit or Loss defined as?
The profit or loss remaining after expenses have been deducted.
What is Capital Expenditure defined as?
The purchase of or improvement of a non-current asset.
PURCHASE
IMPROVE
NON-CURRENT ASSET
Which three basic principles are Double Entry Bookkeeping based upon?
The Dual Effect Principle
The Separate Entity Principle
The Accounting Equation
What is the Dual Effect Principle?
The Dual Effect Principle states that EVERY TRANSACTION HAS TWO FINANCIAL EFFECTS.
Define ‘Purchases’
The goods or services a business buys in order to make the goods or provide the services it sells.
Describe the Purchase Ledger
it is the group of individual credit Supplier accounts or Trade Payable accounts.
Is a subsidiary ledger as it is not part of the double entry process.
Entries into individual supplier accounts are memorandum posting, that are repeats of the actual double entry postings that occur in the PLCA.
Records activity of credit transactions only.
What is the Purchase Ledger Control Account?
The purchases ledger control account is the individual ledger account that records the TOTAL OWED by the business to all credit suppliers.
This figure will feature as a LIABILITY on the balance sheet.
What type of account is Accounts Payable and where dies it appear in the financial accounts?
Accounts Payable (or Trade Payable) is a LIABILITY because it is money the business OWES to its creditors.
It represents costs incurred which have not been paid yet.
It is listed under Current Liabilities on the BALANCE SHEET.
What is the Statement of Financial position?
The balance sheet is also known as the Statement of Financial Position and it reports a company’s assets, liabilities, and Capital at particular a moment in time.
It is presented as part of the Annual Accounts.
It also reflects the accounting equation:
Assets = Liabilities + Capital
What are a company’s Annual Accounts?
Your company’s annual accounts - called ‘statutory accounts’ - are prepared from the company’s financial records at the end of your company’s financial year.
You must always send copies of the statutory accounts to:
- all shareholders
- people who can go to the company’s general meetings
- Companies House
- HM Revenue and Customs (HMRC) as part of your Company Tax Return
Statutory accounts must include:
• a ‘balance sheet’, which shows the value of everything the company owns, owes and is owed on the last day of the financial year
• a ‘profit and loss account’, which shows the company’s sales, running costs and the profit or loss it has made over the financial year
notes about the accounts
• a director’s report (unless you’re a ‘micro-entity’)
You might have to include an auditor’s report - this depends on the size of your company.
The balance sheet must have the name of a director printed on it and must be signed by a director.
