Accounting principles and procedures Flashcards
(11 cards)
What are the three main financial statements and what do they show?
Balance Sheet – A snapshot of the company’s financial position at a point in time, showing assets, liabilities, and equity using the formula: Assets = Liabilities + Equity.
Profit & Loss Statement – Also called the income statement, it shows financial performance over a period, detailing revenues, expenses, and resulting net profit or loss.
Cash Flow Statement – Outlines cash inflows and outflows grouped into operating, investing, and financing activities. It helps evaluate liquidity and cash management.
What is GAAP, and how is it applied in the UK?
GAAP stands for Generally Accepted Accounting Principles, which are the standard framework of guidelines for financial accounting. In the UK, this is represented by UK GAAP, especially FRS 102, used by most non-listed companies. It governs how financial statements are prepared and ensures consistency. Under UK GAAP, properties are usually held at historical cost, unless the company adopts a revaluation model. Investment properties may be revalued with movements reflected in the income statement or revaluation reserve.
What is the difference between UK GAAP and IFRS in accounting for property?
UK GAAP (FRS 102) uses the cost model by default, though a revaluation model is permitted for investment property. IFRS, particularly under IAS 40, uses the fair value model for investment properties, with any valuation changes going through the profit and loss account. IFRS is more market-based and aligns with international reporting, while UK GAAP can be more conservative.
What is the accruals principle in accounting, and how does it differ from cash accounting?
The accruals principle requires that revenues and expenses are recorded when earned or incurred, not when cash is received or paid. This matches income to the relevant period and provides a true financial picture.
In contrast, cash accounting only records transactions when money changes hands. While simpler, it can distort financial performance if large sums are owed or prepaid.
What is the role of an external auditor in relation to company accounts?
An external auditor is an independent professional who examines a company’s financial statements to determine if they present a true and fair view and comply with the relevant accounting standards (e.g., UK GAAP or IFRS). They review internal controls, assess financial risks, verify asset values, and ensure the accuracy of disclosures. Their audit opinion increases stakeholder trust and is often required for compliance with corporate law or lending agreements.
How does a property asset appear on the balance sheet, and how is it typically valued?
A property appears under non-current assets. If it’s an owner-occupied asset, it’s recorded at cost less depreciation. If it’s held as an investment property, it can be valued at fair value under IAS 40 (IFRS), with changes posted through the profit and loss. Under UK GAAP (FRS 102), the cost model is default, but revaluation is allowed with increases recognised in a revaluation reserve, not always through P&L.
What is the difference between depreciation and amortisation?
Depreciation is the systematic allocation of the cost of tangible fixed assets (e.g. buildings, equipment) over their useful life. Amortisation applies the same principle to intangible assets (e.g. patents, goodwill). Both are non-cash expenses used for accounting purposes to match the cost of an asset to the income it helps generate.
What are retained earnings and where are they shown?
Retained earnings are the portion of net profits not paid out as dividends but retained in the company for reinvestment or to strengthen the balance sheet. They appear under equity in the balance sheet and reflect cumulative undistributed profits over time.
Why is cash flow management important for a Project Manager?
Cash flow impacts a project’s ability to fund works, pay contractors, and manage risk. Delays in receiving or making payments can stall work, trigger disputes, or breach contracts. Understanding cash flow allows PMs to forecast funding needs, align cash with milestones, and prevent cost overrun or insolvency scenarios.
Why should a PM understand a contractor’s balance sheet?
It helps assess financial stability. A contractor with high debt or poor liquidity may pose a risk to the project through delayed delivery or insolvency. The PM can identify potential issues early and recommend mitigation, such as parent company guarantees, bonds, or staged payments.
What is double-entry bookkeeping and why is it important?
Double-entry bookkeeping ensures that every transaction affects at least two accounts: one debit and one credit, keeping the accounting equation balanced. It improves accuracy, enables error checking, and forms the basis of all financial reporting.
