Accounting adjustments (Final accounts and adjustments)

Question 1

What is the general formula to determine profit in the profit and loss account?

Answer 1

Profit = Income - Expenses

Question 2

What is income?

Answer 2

Money brought in before considering expenses

Question 3

What are expenses?

Answer 3

Money spent on things where the benefit is used up quickly (e.g. marketing, wages)

Question 4

Explain how you know if a business has made a profit

Answer 4

If income exceeds expenses

Question 5

Explain how you know if a business has made a loss

Answer 5

If expenses exceed income

Question 6

What does the profit and loss account show?

Answer 6

Income and expenses

Question 7

What doesn’t the profit and loss account show?

Answer 7

Assets and liabilities

Question 8

What is an asset?

Answer 8

Things that a business owns that are worth money - e.g. machinery, debts owed to the business

Question 9

What are liabilities?

Answer 9

They show where the business owes money

Question 10

True or False:
When the business has made a profit, it has that profit available in cash

Answer 10

False

Question 11

What is a business’ turnover made up of?

Answer 11

Bills that have been sent out and may not be paid until the end of the year

Question 12

What are the 3 reasons that a business may not have their profit readily available in cash?

Answer 12

1. The turnover is made up of bills that have been sent out and may not be paid by the end of the year
2. Assets are worth money in the form of something else, so money will have been spent on those assets
3. Many business attribute spare cash left in a bank account for upcoming bills as an expense

Question 12

What is a balance sheet?

Answer 12

A list of assets and liabilities of the business ON THE LAST DAY OF THE ACCOUNTING PERIOD

Question 13

How do you calculate the net worth of a business?

Answer 13

Net worth = assets - liabilities

Question 14

A balance sheet is divided into 2 sections, what are these sections?

Answer 14

1. Employment of capital or assets
2. Capital employed or financed by

Question 15

What does the “employment of capital or assets” section of the balance sheet show?

Answer 15

The worth of the business TO THIRD PARTIES

Question 16

What does the “capital employed or financed by” section of the balance sheet show?

Answer 16

The worth of the business TO THE PROPRIETOR
OR
how much the proprietor of the business would get if the business was wound up

Question 17

True or False:
The separate amounts of the “employment of capital or assets” and “Capital employed or financed by” sections of the balance sheet should be the same

Answer 17

True - the balance sheet should balance, net assets = capital

Question 18

What are the 2 categories of assets of a business?

Answer 18

1. Fixed assets
2. Current assets

Question 19

What are fixed assets?

Answer 19

Assets that are not bought with the intention of reselling but still provide a long term benefit to the business

Question 20

What is an example of a fixed asset?

Answer 20

Machinery
Premises
Computers
Stationary

Question 21

What are current assets?

Answer 21

These are short term assets

Question 22

What is an example of a short term asset?

Answer 22

Cash
Debtors

Question 23

How are assets listed on the balance sheet?

Answer 23

In decreasing order of permanence (or increasing order of liquidity)

Question 24

True or False: When listing assets in the balance sheet, current assets are listed before fixed assets

Answer 24

False - other way round

Question 25

What are the 2 forms of liability that a company may owe?

Answer 25

Current liabilities Long-term liabilities

Question 26

What are current liabilities?

Answer 26

Liabilities that are repayable in 12 months or less from the date of the balance sheet

Question 27

What are long-term liabilities?

Answer 27

Liabilities that are repayable in more than 12 months from the date of the balance sheet

Question 28

What is the formula for a company's net current assets?

Answer 28

Net current assets = current assets - current liabilities

Question 29

What is the significance of a negative net current assets figure?

Answer 29

It means that the business does not have enough available liquid assets (or current assets) to meet its liabilities within the next 12 months

Question 30

What is the formula for a company's net assets?

Answer 30

Net assets = (Total fixed assets + Total current assets) - (Total current liabilities + Total long-term liabilities) OR Total assets - Total liabilities

Question 31

What should the net assets total be equivalent to?

Answer 31

The amount owing to the proprietor as capital at the end of the year

Question 32

Why should the net assets be equal to the amount owing the proprietor as capital at the end of the year?

Answer 32

The net assets figure shows how much the proprietor would get if the business were wound up, as they would get what is left after liabilities have been paid to creditors.

Question 33

What are accruals?

Answer 33

Outstanding expenses - bills that the business has received but not yet paid

Question 34

How do accruals effect the profit and loss account and the balance sheet?

Answer 34

Profit and loss account - Increase expenses in the current accounting year Balance sheet - Increase current liabilities

Question 35

How should an accrual be labelled on a balance sheet?

Answer 35

As a current liability

Question 36

How should a profit and loss account be adjusted when dealing with accruals and why?

Answer 36

By increasing the expenses figure as the expense was incurred during the current accounting year, even though it may not be paid until the next year

Question 37

How do payments in advance effect the profit and loss account and the balance sheet?

Answer 37

Profits and loss account - Reduces expenses in the current accounting year Balance sheet - Increases current assets in a figure labelled prepayments

Question 38

Draw up a rough appropriation account with the following info; Wendy contributes capital of £5000 and Peter contributes £2000. The net profit for the year is £21,700. There is interest on capital at 10% pa, a salary for Peter at £1000 pa and the remaining profits to be divided 3:1

Answer 38

Page 49 of account for solicitors book for answer