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AC Flashcards

1
Q

What are the two elements of accounting

A

Recording
Summarising

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2
Q

What does recording consist of

A

Transactions must be recorded as they occur in order to provide up to date information for management. This is also known as bookkeeping

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3
Q

What does summarising consist of

A

The transactions for a period are summarised in order to provide information about the company to interested parties. This is done through financial statements (P&L, Balance sheet, etc)

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4
Q

What does a statement of profit or loss (P&L) show

A

It reflects the performance of a business over a period of time

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5
Q

What does the statement of financial position (balance sheet) show?

A

Reflects the position of a business at a point in time

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6
Q

Who needs accounting?

A

Any organisation/business/individual who needs to keep track of their income, expenses, assets and liabilities.

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7
Q

What are the types of business?

A

Sole trader
Partnership
Company

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8
Q

What is a sole trader?

A

A business owned and operated by one person. They are fully and personally liable for any losses that the business might make.

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9
Q

What is a partnership?

A

A business owned and operated by two or more people. Each partner is jointly and severally liable for any losses that the business might make.

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10
Q

What is a company?

A

A business owned by any number of shareholders and operated by directors (who may or may not be shareholders).

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11
Q

What are the main financial statements?

A

Statement of financial position (balance sheet)
Statement of profit or loss (P&L)
Statement of changes in equity
Statement of cash flows
Notes to the financial statements

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12
Q

What is capital expenditure?

A

It is incurred either:
- To acquire long-term assets (I.e those which will be kept in the business for more than one year), or
- To improve or enhance the earning capacity of long term assets

Such expenditure is recorded on the statement of financial position within Non-current assets.

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13
Q

What is revenue expenditure?

A

It is incurred either:
- For trade purposes (purchases of raw materials/components, expenditure on wages/salaries, selling and distribution expenses, admin expenses and finance costs), or
- To maintain the existing earning capacity of long-term assets

Such expenditure is recorded on the P&L

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14
Q

What is the accounting equation?

A

Assets = Liabilities + Capital

This links to the separate entity concept as the business will buy assets using borrowed funds/capital that is then owed to the owner.

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15
Q

What are non-current assets?

A

Assets acquired for on-going, long-term use in the business. E.g. Land/buildings, motor vehicles, plant/machinery.

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16
Q

What are current assets?

A

Assets acquired for resale or expected to be realised within the normal course of trading. E.g. inventory (stock), receivables (money owed by credit customers) and cash.

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17
Q

What are non-current liabilities?

A

Long-term liabilities payable more than 12 months after the statement of financial position date. E.g. a loan

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18
Q

What are current liabilities?

A

Liabilities which are payable within 12 months of the statement of financial position date. E.g. Trade payable (money owed to credit suppliers), overdraft.

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19
Q

What is the business entity concept?

A

It states that:
- Financial accounts should only show the activities of the business and not the personal activities of its owners.
- The business entity is treated as separate from its owners
Despite this, there will be flows of money between the owner and the business such as capital invested into the business by the owner and ‘drawings’ for the owner to live on. These should be recorded on the business’s accounts

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20
Q

What is Capital?

A

It is how much the business owes back to the owner.

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21
Q

What is the calculation for year end capital for a sole trader?

A

(Balance at start of year) + (Profit/Loss for year) + (Capital injections) - (Drawings/Dividends)

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22
Q

What is the duality concept?

A

This concept states that every transaction has a dual effect.

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23
Q

Accounting Principle - Inventory

A

We initially record inventory at how much it cost us (asset).
If we sell inventory for more than it cost us, we have made a profit which increases capital
If we’ll sell inventory for less than it cost us, we have made a loss which reduces capital

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24
Q

What are the fundamental characteristics identified by the CFFR?

A

Relevance & Faithful Representation

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25
Q

What are the aspects of Relevance according to the CFFR?

A

Information must be relevant in Nature or Materiality (significance)

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26
Q

What are the 4 enhancing qualitative characteristics according to the CFFR?

A

Comparability
Understandability
Timeliness
Verifiability

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27
Q

What must information be in order to be faithfully represented?

A

Completed
Neutral (unbiased)
Free from error
Showing substance over form (transactions must be presented according to their economic substance rather than legal form)

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28
Q

What is Comparability?

A

Information should be produced on a consistent basis so that it can be compared with earlier periods. Financial statements should also be comparable with other entities

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29
Q

What is Verifiability?

A

Information can be checked.
A consensus could be reached by observers that the information faithfully represents transactions

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30
Q

What is Timeliness?

A

Information should be supplied to users in time to be used in decision-making.
Recent information is generally more useful.

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31
Q

What is Understandability?

A

Information should be understandable by users with a reasonable knowledge of business/accounting

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32
Q

What are the underlying assumptions of the CFFR?

A

The CFFR identifies the going concern basis as an underlying assumption

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33
Q

What is the IAS 1 Presentation of Financial Statements

A

Prescribed formats for financial statements that are recommended (not compulsory). This helps to ensure comparability in financial statements.

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34
Q

What does IAS 1 Presentation of Financial Statements include?

A

Balance Sheet
P&L
Statement of Changes in Equity
Statement of Cash flow
Accounting policies and explanatory notes

35
Q

What is the Accrual concept?

A

It states that transactions/events are recognised when they occur, not when cash is received or paid for them. This means that costs incurred in generating income are matched against the revenues they have generated.

36
Q

What is the Going Concern concept?

A

The entity of viewed as continuing its operations for the foreseeable future (at least 12 months). An assumption is made that there is no intention to liquidate its operations. This means that assets do not need to be valued on a break-up basis (how the could be sold separately) if the business were to be liquidated.

37
Q

What happens if Going Concern is not appropriate?

A

If management believes going concern is not relevant, it must disclose:
The fact itself
The basis in which the accounts have been prepared
The reason why the entity is no a going concern

38
Q

What is Materiality?

A

Materiality means significance. Information is considered material if it’s omission (being left out) or misstatement could influence the basis of the financial statements. It depends on the size or effect of the item judged in context. E.g an error of 30,000 in a business with 1,000,000 sales revenue is immaterial but an error of 30,000 in inventory of 100,000 is considered material.

39
Q

What is Offsetting?

A

IAS 1 does not allow assets and liabilities or income and expenses to be offset (deducted) from one another unless other international accounting standard allows such treatment.

40
Q

What is the money measurement concept?

A

Accounts can only record item to which a monetary value can be attributed. This means only assets that can be recorded at a reliable monetary amount will appear in the financial statements.

41
Q

What is the realisation concept?

A

A transaction should be recognised when the event from which it stems has taken place and the receipt of cash from the transaction is virtually certain.

42
Q

What is the Historical Cost Convention?

A

Generally, assets and liabilities are recorded in the balance sheet at their historic cost. Assets are recorded at the amount of cash paid or the fair value of the considerations given for them. Liabilities are recorded at the amount of proceeds received in exchange for the obligation. This removes the subjectivity of estimating the value of an asset/liability

43
Q

What is the formula for Accruals and Prepayments expenses?

A

Cash Paid + Closing Accrual - Opening Accrual - Closing Prepayments + Opening Prepayments

44
Q

What is Closing Inventory?

A

Items of goods held at the end of the year. They are not part of ‘cost of sales’. They are a current asset.

45
Q

What is the Double Entry to record Closing Inventory

A

Dr Closing Inventory (Asset on SPF)
Cr Closing Inventory (Decreasing the cost of sales as they haven’t been sold)

46
Q

What is Opening Inventory?

A

The closing inventory from the previous period. Part of this periods cost of sales (as it should be sold this year) and therefore added to purchases.

47
Q

What is Carriage Inwards?

A

The amount paid by a business for having the goods delivered to it. It is part of cost of sales on P&L

48
Q

What is Carriage Outwards?

A

The amount paid by a business for the delivering goods to its customers. It is a distribution expense on the P&L.

49
Q

What are the Steps to record an Accrual?

A
  1. Record any cash paid during the year in the expense ledger (Dr Expense, Cr Cash)
  2. Calculate whether a closing accrual is required (Dr Expense, Cr Accruals)
  3. Close off the expense ledger (P&L)
  4. Close off the Accruals ledger (CL on SPF)
50
Q

What is the formula for Cost of Sales

A

Opening Inventory + Purchases - Closing Inventory

51
Q

What does Inventory Include?

A

Raw materials
Work in Progress
Finished Goods

52
Q

How should inventory be included in the SFP?

A

The lower of Cost or NRV

53
Q

What is the Cost of Inventory?

A

All expenditure incurred in bringing the product or service to its present location and condition. E.g materials, import duties, freight, direct cots etc.

54
Q

What is Net Realisable Value (NRV)?

A

Revenue expected to be earned in the future when goods are sold less any selling costs or modification costs to enable sale.

55
Q

What happens if goods are stolen or destroyed?

A

They will have a value of 0. They will have been included in purchases at cost. They are given no value in closing inventory. Their cost is charged in COS even though they haven’t been sold, distorting gross profit. So, the original cost of the goods is removed from purchases and the cost of goods is now charged as an expense.

56
Q

What are the 3 methods of calculating Inventory Cost?

A

FIFO
LIFO
AVCO

57
Q

What is LIFO?

A

Last In, First Out. It assumes that the last goods purchased are the first to be sold. This assumes that inventory is always valued at old (possibly out of date) prices.

58
Q

What is FIFO?

A

First In, First Out. Assumes that the first goods purchased are the first to be sold. This assumption means that inventory is always valued at up-to-date prices.

59
Q

What is AVCO?

A

Average Cost. A weighted average for all units in inventory is calculated. Issues are priced at the average cost and the balance of inventory remaining had the same unit valuation. A new weighted average is calculated after every purchase of goods.

60
Q

What is included in COS?

A
  • Opening Inventory
  • Purchases
  • Carriage in
  • Wages on production staff
  • Depreciation on production maintenance
  • P&L on Disposal
61
Q

What is included in Distribution Costs?

A
  • Wages (Marketing and Distribution staff)
  • Sales Commission
  • Vehicle running costs and carriage outwards
  • Depreciation of motor vehicles and other assets used in distribution
  • Marketing Costs (distributing products to customers)
62
Q

What is included in Admin Expenses?

A

Essentially all other costs that do not relate to COS and Distribution

63
Q

How are Current Assets listed on the SFP of a company?

A

Least Liquid to Most Liquid

64
Q

How is Retained Earnings (RE) Calculated?

A

Opening RE X
Profits X
Losses (X)
Dividends (X)

65
Q

What is the Double Entry for a Sales Return (inwards) Originally a credit transaction?

A

Dr Sales
Cr Trade Receivables

66
Q

What is the Double Entry for a Sales Return on a Cash Transaction?

A

Dr Sales
Cr Cash

67
Q

What is the Double entry for a Purchase Return originally bought on Credit?

A

Dr Trade Payables
Cr Purchases

68
Q

What is the Double entry for a Purchase returns originally bought with cash?

A

Dr Cash
Cr Purchases

69
Q

What are Total staff costs?

A

Gross salaries + Employer’s NICs.

70
Q

What is the double entry to record payroll?

A

Dr Wages & Salaries
Cr Cash
Cr Income Tax (PAYE + employees’ NICs + employer’s NICs)

71
Q

What is the double entry to record an irrecoverable debt?

A

Dr Irrecoverable debts expense (IDE)
Cr Receivables

72
Q

What is the double entry to record a debt that has been paid after being written off?

A

Dr Cash
Cr IDE

73
Q

What is an irrecoverable debt?

A

A debt which the business believes will never be paid

74
Q

What are the indications of an irrecoverable debt?

A

The bankruptcy of the customer
The disappearance of the customer
An outright refusal to pay

75
Q

How is IDE shown in the FS?

A

As an admin expense in the P&L

76
Q

What is a doubtful receivable?

A

A receivable which a business believes may not be paid

77
Q

How are doubtful debts recognised in the FS?

A

They are not removed from the receivables in case the customer does pay up. However, an allowance is set up, a credit balance which is netted off against the receivables in the SFP. AFR is recalculated each at each year end. (Reverse the c/f, and calculate closing balance)

78
Q

What is the double entry for doubtful debts?

A

Dr IDE
Cr Allowance for Receivables (AFR)

79
Q

How do you account for AFR

A

Reverse the opening balance
Dr AFR
Cr IDE
Calculate and post the closing balance
Dr IDE (P&L)
Cr AFR (SFP)

80
Q

How should you approach an AFR question?

A
  1. Insert b/f balances
  2. Reverse out opening AFR
  3. Write off IDE and record any recovery of IDE
  4. Close off receivables account
  5. Calculate and post the AFR
  6. Close AFR and IDE
81
Q

What is the double entry for when we receive cash from a credit customer we previously had an allowance for?

A

Dr Cash
Cr Receivables

82
Q

What is the double entry if we write off a customers debt and we previously had an allowance for?

A

Dr IDE
Cr Receivables

83
Q

What is the double entry for when we write off a debt as irrecoverable and the debt is recovered?

A

Dr Cash
Cr IDE

AC (17 decks)

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