Business accounts

Question 1

Financial statements prepared in respect of each accounting period

Answer 1

• profit and loss account
• balance sheet

Question 2

Principles of double entry book-keeping

Answer 2

There are two entries!!

Debit entry

Credit entry

Question 3

Trial balance

Answer 3

A list of all the balances on all of a business’s ledgers/accounts as at the end of an accounting period.

Trial balance shoes debit balances in one column and credit balances in another column. Total of the two columns should be the same (and balance)

Question 4

ALCIE

Answer 4

Asset

Liability

Capital

Income

Expenditure

Question 5

Fixed/non-current assets

Answer 5

Fixed asset:

must be held by the company for over a year and provide long-lasting benefits to the company.

Question 6

Current assets

Answer 6

Assets which are continually flowing through the business:

• stock
• debtors
• cash

Question 7

Current liabilities

Answer 7

• bank overdraft
• trade creditors

Question 8

Long-term/non-current liabilities

Answer 8

• term loan
• falls due after more than one year

Question 9

Capital

Answer 9

Money invested and includes retained profits

Question 10

Expense accounts

Answer 10

Records day to day spending.

Does not include spending on long-term assets.

Question 11

Income accounts

Answer 11

Record sums received by the business such as payments from customers in relation to sales.

Question 12

Year-end adjustments

Answer 12

Adjustments

e.g. where there are prepayments for services in next accounting year

Question 12

Profit and loss account

Answer 12

Records the income and expenses of a business to arrive at a profit (or loss) figure for that period.

Income entries from trial balance are at the top of the profit and loss account.

Added together for gross profit.

minus expenses

get net profit

Question 13

Formula for costs of sales

Answer 13

Opening stock + purchases – closing stock = cost of sales​

Question 14

What is a balance sheet

Answer 14

A record of the position in respect of its assets, liability and capital accounts from the trial balance.

It is a ‘snapshot’ relevant on a given date.

Question 15

Top half of the balance sheet

Answer 15

Net worth or net asset value of the business

Will be the same as the bottom half

(assets and liabilities)

Question 16

Bottom of the balance sheet

Answer 16

Capital invested in the business

Will be the same as the top half

(capital)

Question 17

Partnership accounts

Answer 17

• each partner will have a capital and current account
• partners will take ‘drawings’ out of profits
• surplus profits are distributed as:
• interest on capital
• ‘salaries’
• remaining profits to agreed profit sharing ration
• Must draw up a profit appropriation statement before balance sheet is drawn up

Question 18

What is a profit appropriation statement?

Answer 18

A profit appropriation statement is a way of working out the distribution of profits in a partnership.

Question 19

Company accounts: bottom half of the balance sheet

Answer 19

Shows ‘total equity’/’equity reserves’:

Capital consists of:

• share capital
• reserves
• retained earnings

Question 20

Statement of equity/Statement of changes in Equity

Answer 20

An addition to the balance sheet which shows profits brought forward plus current year profit (less dividends paid).

Question 20

How do companies’ financial statements deal with tax

Answer 20

The Profit and Loss Account of a company includes a statement of the tax the company should pay on its profits.

Question 21

What is the impairment of receivables on a company balance sheet?

Answer 21

The provision for doubtful debts.

Question 22

Called up share capital

Answer 22

Shows how must of the share capital has been ‘called-up’.

Amount of the nominal value of the shares that the company has required its shareholders to pay.

Question 23

Revaluation reserve

Answer 23

Created when a company's directors as a matter of policy wish to show more up to date values of non-current assets in the accounts. Represents a notional profit to the company from the rise in value of the asset. This profit is not realised until the asset is sold which is why it is a reserve and not distributable as a dividend until the company sells the asset.

Question 24

Share premium account

Answer 24

Represents the difference between the nominal value of the shares and the amount that the shareholders actually paid for the shares ie subscription.

Question 25

What are retained earnings?

Answer 25

Retained earnings is the reserve account for retained profits.

Question 25

Statement of Changes in Equity

Answer 25

Appended to balance sheet Shows the retained earnings: - brought forward - profit from the year - dividends paid Retained earnings now

Question 26

Dividends

Answer 26

Are paid or payable out of profits generated in the current or previous accounting period. Any company can make one if it has profits available. Affects the capital section so shows up in SoCiE and does not belong on a Profit and Loss account.

Question 27

Final and interim dividends

Answer 27

Final dividend: declared after the year end and paid some time thereafter Interim dividend: paid during, and in respect of the current accounting period

Question 28

Process for final dividend

Answer 28

Final dividend is recommended by the company's directors in the Directors' Report and declared by the shareholders by ordinary resolutions. Until OR - proposed dividend After OR passed - declared dividend Declared dividend is a debt of the company to the shareholders and is enforceable.

Question 29

Interim dividend process

Answer 29

Totally at discretion of directors. Unpaid interim dividend not a debt shareholders can sue on. Interim dividends only in accounts if actually paid.