BLP: Business Accounts Flashcards
(34 cards)
What is double-entry bookkeeping?
A system where every transaction is recorded as both a debit and a credit, ensuring total debits equal total credits for an accounting period
What is a trial balance, and why is it prepared?
A list of all ledger balances showing debit balances in one column and credit balances in another; prepared at period end to verify that total debits equal total credits before drafting financial statements
In the ALCIE classification, what does each letter stand for?
A: Asset, L: Liability, C: Capital, I: Income, E: Expense
Which accounts from a trial balance appear on the profit and loss account?
Only income and expense accounts; asset, liability, and capital accounts do not appear on the profit and loss account
What is the purpose of a profit and loss account?
To record all income earned and expenses incurred during an accounting period, arriving at net profit or loss for that period
How is gross profit calculated in a profit and loss account?
Total income minus cost of sales (opening stock + purchases – closing stock)
Where do depreciation charges appear in the financial statements?
Depreciation charges appear as expenses in the profit and loss account and accumulate in a provision for depreciation liability on the balance sheet
What is a balance sheet, and what does it show?
A snapshot of a business’s financial position at a given date, showing assets, liabilities, and capital, with assets equaling total liabilities and equity (net assets)
How are fixed assets presented on a balance sheet?
At cost less accumulated depreciation, yielding their net book value
How are net current assets calculated?
Total current assets minus total current liabilities
What is the formula to confirm the balance sheet balances?
Fixed assets (net book value) + net current assets – long-term liabilities = total equity (net assets)
What are year-end adjustments, and why are they needed?
Transactions or modifications (depreciation, accruals, prepayments, bad debts, doubtful debts) made to match income and expenses to the correct accounting period and ensure accurate asset/liability values
How does the straight-line method of depreciation work?
Spreads the cost of an asset evenly over its useful life by charging the same amount each year (Cost ÷ Useful Life)
How does the reducing balance method of depreciation work?
Charges a fixed percentage of the asset’s net book value each year, resulting in larger depreciation charges earlier and smaller charges later
What entry records depreciation on the balance sheet?
An accumulated depreciation (provision) account is increased by the depreciation charge, reducing the net book value of the related fixed asset
What is an accrual, and how is it treated?
An expense incurred but not yet paid or recorded by year-end; added as an expense in the profit and loss account and recorded as a current liability on the balance sheet
What is a prepayment, and how is it treated?
An expense paid in advance but relating partly to the next accounting period; only the portion for the current period is expensed, and the remainder is recorded as a current asset prepayment
What is the difference between a bad debt and a doubtful debt?
A bad debt is known to be irrecoverable and is written off completely, while a doubtful debt is a potential non-payment where a provision is made but not fully written off
How is a provision for doubtful debts shown on the financial statements?
As a contra-asset (or liability) that reduces receivables on the balance sheet; the increase/decrease in the provision is recorded as an expense (or income) in the profit and loss account
What two components make up a partner’s capital in partnership accounts?
A capital account (long-term, typically fixed contributions) and a current account (withdrawable, recording share of profits and drawings)
What is the purpose of a profit appropriation statement in partnership accounts?
To allocate net profit among partners for interest on capital, partners’ salaries (notional), and residual profit according to the agreed profit-sharing ratio before updating individual capital/current accounts
How are drawings treated in partnership accounts?
Recorded in each partner’s current account as withdrawals against their share of profits; treated as a reduction in the partner’s capital in the balance sheet
What are the key differences between company accounts and sole trader/partnership accounts?
Company accounts include corporation tax in the profit and loss account, show share capital and reserves in the equity portion of the balance sheet, and must file statutory accounts; sole traders/partnerships do not pay tax at entity level and show owner’s capital/drawings instead
What is a company’s accounting reference date (ARD)?
The last day of the month in which the anniversary of incorporation falls (unless changed by the company), determining the period for which accounts are prepared
