Accounting Principles Flashcards
(21 cards)
Differences between Limited Company, Public Company, Partership and Sole Trade
Limited Company - Owned by one or more individuals or entities (shareholders) but cannot trade shares publicly. Owners are only liable for business debts up to their investment (usually share price)
Public Company - Ownership is distributed among many shareholders who have bought and sold shares. Can offer shares to the public and are often listed on a stock exchange.
Partnership - Involves two or more individuals sharing responsibility, profits and liabilities
Sole Trader - Simple business structure where one individual owns and operates the business with no separation between personal and business finances
Dun & Bradsheet Report
A comprehensive business credit report that provides information about a company’s financial health, payment behaviour, and overall credit worthiness.
Reports help businesses assess the risk of lending or doing business with a company.
Evaluates current and future health of a company, including the likelihood of bankruptcy, inactivity or going out of business.
Insolvency / Liquidation / Administration
Insolvency - State of being unable to pay debts when they are due
Liquidation - Formal procedure to close down a company and sell its assets to repay creditors
Administration - Process aimed at rescuing a business and allowing it to continue trading often by restructuring or selling parts of the business.
Liquidity Ratios
Measure a company’s ability to pay its short term debts by converting assets into cash.
Current Assets / Current Liabilities
Profitability Ratio
Measure the ability of a company to generate income (profit) relative to revenue, operating costs, balance sheet assets or shareholders’ equity.
Financial Gearing Ratios
Financial metrics that measure a company’s debt relative to its equity.
Net Debt / Shareholders’ Equity
A high gearing ratio - suggests a company relies heavily on debt, making it more vulnerable to economic downturns
Range between 25-50% is optimal
What is a balance sheet?
A financial statement that reports a company’s assets, liabilities and shareholder equity at a point in time, usually annually.
Long term liability vs current liability
Long term is debt owed over a year
Current - owed within a year
Current and non current asset
Current = one that can be converted to cash within a year
Non-current = less liquid and harder to generate cash
What are the key financial statements that companies provide?
Profit and loss accounts
Balance sheets
Cash flow statements
What is the difference between management and financial accounts?
Management accounts are for the internal use of the management team
Financial accounts are the company accounts that are required by UK law
What is the difference between a profit and loss account and a balance sheet?
A profit and loss account shows the incomes and expenditures of a company and the resulting profit and loss
The balance sheet shows what a company owns (it’s assets) and what it owes (it’s liabilities) at a given point in time
What is a cashflow statement?
It is the summary of the actual or anticipated ingoing and outgoing of cash in a firm over the accounting period
It measures the short-term ability of a firm to pay off its bills
Define: Capital Allowances
Tax relief on certain items purchased for the business e.g. tools and equipment
Define: Sinking funds
Funds that are set aside for future expenses or long-term debt
Define: Insolvency
An inability to pay debts where liabilities exceed assets
Define: Companies House
An agency that incorporates and dissolves limited companies within the UK
Define: HMRC
His Majesties Revenue and Customs
What is an asset?
Anything that can be deemed to have a value attached to it
E.g. cash, investments, equipment, real estate
What is a liability?
Debts or obligations yet to be paid
E.g. mortgages, salaries to pay, loans etc
What is taxation?
The amount of money or % that is owed to HMRC based on the company’s profit
