Chapter 1 - Intro Flashcards
What are financial statements?
- financial records of an organisation
What do financial statements primarily comprise of?
- P&L
- balance sheet
What does accounting represent?
- the techniques involved in recording the transactions of the business on a regular basis
What does bookkeeping refer to?
- process of recording financial transactions
The actual system of accounting chosen by the business should be able to determine?
- whether the business is operating a profit
- can the business meet its liabilities as they fall due
What 3 questions must the accounting system be able to answer?
- How well is the business doing (is it profitable?)
- What does the business own (assets)
- How much does the business owe (liabilities)
Why might the owners of the business use financial statements?
- to see how their investment is performing
Why might management within a business use financial statements?
- to see if they are running the business profitably and efficiently
Why might employees be interested in financial statements?
- to know if their jobs are secure
Why might creditors be interested in a business’ financial statements?
- to see if the business can pay the amounts owed and on time
Why would HMRC be interested in a business’ financial statements?
- informs them how much tax should be paid on the business transactions
Why would banks other lenders be interested in a business’ financial statements?
- to assess whether it is safe to lend to the business
Tax legislation dictates the adjustments that are made to the accounting figures produced from the records , what are these adjustments known as?
- adjustments to profit
What is the starting point for adjustments to profit?
- net profit/loss as calculated from the financial statements
What do accounting standards require regarding the preparation of accounts?
- prepared on an accrual basis
- same basis used for tax purposes
What is cash basis?
- income is accounted for when it is actually received and allowable expenses are deduced when the cash is paid
What businesses are eligible to use cash basis?
- unincorporated business’
- I.e a sole trader or partnership with income < £150,000
- limited liability partnerships are ineligible to use the cash basis as are partnerships where one or more of the partners is a company
Describe a sole trader
- business and personal affairs of the sole trader are not distinguished in any way
- sole trader can be required to use personal assets to repay business debts
Describe a partnership
- two or more persons associated for the purpose of a business or profession
- business and personal affairs are not separate
- in Scotland, however, partnership is regarded as a legal seperate entity, I.e partners have limited liability
Describe a company
- distinct legal ‘person’ created in order to separate responsibility for the affairs of a business from the personal affairs of the individuals who own the business
- owners have limited liability - will not be required to contribute further towards the liabilities of the company
Describe a LLP
- Like a company liability of members to contribute to the LLP’s debts is limited to the LLP’s assets
- governed internally by an agreement between members which will perform the function of a partnership agreement
For accounting purposes the individual business is always regarded as an entity in its own right, why?
- necessary to know the business itself aside from the owners personal affairs
- easy to achieve in a company and LLP
- with a sole trader and partnership the business element must keep separate records distinct from private affairs
What is the balance sheet?
- summarises assets, liabilities and capital of a business at a particular date
What is an asset
- something that is owned by the business and use used by the business on an ongoing basis to help generate profit
- e.g premises, vehicles, stock, debtors, cash
