Accounting AS Level Flashcards
accounting concepts (11) + examples
- business entity (only business related transactions are to be recorded, not private) (drawings)
- prudence (not overstating assets or profits) (bad debts)
- money measurement (only monetary terms should be used)
- historic cost (transactions are to be recorded at their cost to the business)
- realisation (transactions are only realised when the profit is earned)
- duality (every transaction will affect 2 items in the business)
- consistency (transactions of similar nature are recorded in the same way)
- materiality (not wasting time on trivial transactions)
- accruals/matching (expenses are recorded alongside revenues)
- going concern (assumes business will continue)
- substance over form (practical view is preferred over legal
pros & cons of sole trader (3)
pros:
- keep all profits
- make all decisions
- easy to set up
cons:
- unlimited liability
- more workload
- lack of continuity
pros & cons of partnership (3)
pros:
- shared responsibility & risk
- more capital
- easy to set up
cons:
- unlimited liability
- conflict
- profit sharing
pros & cons of limited company (3)
pros:
- limited liability
- easier to raise capital
- continuity
cons:
- complex set up
- risk of conflict
- longer decision making
purpose of a trial balance
ensures total debits equal total credits, helping detect errors, prepare financial statements, and verify accounting accuracy before finalizing reports.
advantages and disadvantages of maintaining full accounting records (2)
pros:
- better decision making
- improved credibility for loan
cons:
- time consuming & costly
- not needed for some
advantages and disadvantages of introducing a computerised accounting system (2)
pros:
- increased accuracy & speed
- better organization
cons:
- costs + training
- data security
ways to ensure data security in computerised accounting system (3)
- back up data regularly
- passwords
- limited access
treatment of capital and revenue income and capital and revenue expenditure
capital:
income: increase in capital
expenditure: increase in NCA
revenue:
income: increase revenue
expenditure: increase in expense
factors that cause the value of non-current assets to depreciate (2)
- wear & tear
- obsolescence
Purpose of Accounting for Depreciation of Non-Current Assets (2)
- satisfy prudence concept (reflects real expenses & asset value)
- satisfy matching concept (Depreciation spreads the cost of an asset over its useful life, ensuring expenses are matched to the revenue generated in each period.)
appropriate method of depreciation
straight line: assets that lose value consistently (buildings & furniture)
reducing balance: assets that lose value quickly in early years (vehicles & computers)
effect of depreciation on statement of profit or loss and statement of
financial position
statement of profit or loss: expense
statement of financial position: reduces NBV
The Need to Reconcile and Verify Ledger Accounts Using Internal and External Documentation
- ensures accuracy
- improved decision making
- compliance with accounting standards
benefits and limitations of reconciliation and verification procedures
pros:
- improves accuracy
- better decision making
cons:
- time consuming & complex
- human errors
errors which do not affect the trial balance (6)
– omission (not recorded at all)
– commission (wrong account/name)
– principle (wrong account of different class)
– original entry (wrong amount)
– reversal (wrong side dr or cr)
– compensating (2 errors that offset each other)
benefits and limitations of a trial balance (2)
benefits:
- detects some errors (arithmetic)
- simplifies preparation of financial statements
limitations:
- doesnt detect all errors
- doesnt show profitability or liquidity (financial health)
benefits and limitations of preparing a bank reconciliation statement (2)
benefits:
- detects error & fraud
- helps identify timing differences between the business and the bank
limitations:
- time consuming
- human error
benefits and limitations of control accounts (2)
benefits:
- detects errors & fraud
- makes it easier to check balances (saves time)
limitations:
- cant detect all errors (If source documents contain errors, control accounts will also be incorrect)
- Could Lead to Over-Reliance (miss errors within individual accounts)
why partners may maintain separate capital accounts and current accounts (2)
- To record the profit/loss allocated to each partner and to record his/her withdrawals of profits
- To record the amount of capital contributed and withdrawn by each partner
no partnership agreement (5)
- equal capital contribution
- equal share profit ratio
- no interest on capital or drawings
- interest on loan 5%
- no salaries
advantages and disadvantages to partners of maintaining a partnership agreement
pros:
- avoids conflict
- legal protection
cons:
- lack of flexibility
- legal costs
advantages & disadvantages of issuing shares vs debentures (2)
shares:
- no interest payments
- no fixed liabilities to pay (less risky)
- dilution of ownership
- dividends are expected by shareholders
debentures:
- no dilution of ownership
- Fixed Interest Payments (Predictable Cost) (can compare rate of interest to other forms of NCL to see which is better)
- interest payments
- may require collateral/security
advantages & disadvantages of bonus issue vs rights of issue (2)
bonus issue:
- rewards existing shareholders
- no cash outflow
- no cash raised
- Not suitable for companies with weak financials (bcs doesnt help cash flow)
rights issue
- raises cash
- Gives existing shareholders priority (Avoids dilution from new investors)
- dilution risk if not all shareholders purchase
- drop in share price due to discount
