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Accounting AAT Level 3 > Financial Accounting > Flashcards

Financial Accounting Flashcards

1
Q

What is the Statement of Profit or Loss (SoPL) also known as?

A

Income Statement

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2
Q

What is the Statement of Financial Position (SoFP) also known as?

A

Balance Sheet

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3
Q

The SoFP and SoPL provide useful information for whom?

A

Lenders, Investors and other creditors

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4
Q

Why are lenders, investors and other creditors interested in a business’s SoPL & SoFP?

A

The SoPL & SoFP provide useful information which help make users make economic decisions.

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5
Q

What are the 3 main ledgers?

A
  1. Sales Ledger
  2. Purchases Ledger
  3. General Ledger
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6
Q

What is the Sales Ledger?

A

The sales ledger comprises of individual customer accounts.

It does not use double-entry

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7
Q

What is the Purchases Ledger?

A

The purchases ledger comprises of individual supplier accounts

It does not use double-entry

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8
Q

What is the General Ledger?

A

The general ledger comprises of all the other ledgers.
Includes accounts such as wages, investments, loans etc.
It is used to prepare the trial balance.

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9
Q

What is a Subsidiary Account?

A

A subsidiary account comprises of the different bank accounts a business may have. It is part of the sales ledger and purchases ledger so is not included in the trial balance

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10
Q

What is a Control Account?

A

A control account is the Master Account of all the subsidiary accounts. It forms the Sales Ledger Control Account and the Purchases Ledger Control Account in the general ledger. It is a part of the trial balance.

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11
Q

What is the Sales Ledger Control Account?

A

It comprises of Trade Receivables

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12
Q

What is the Purchases Ledger Control Account?

A

It comprises of Trade Payables

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13
Q

What are the 5 main types of General Ledger Accounts? (ALICE)

A

Assets
Liabilities
Income
Capital
Expenses

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14
Q

Which of the 5 main types of general ledger accounts form the SoFP?

A

Assets
Liabilities
Capital

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15
Q

Which of the 5 main types of general ledger accounts form the SoPL?

A

Income
Expenses

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16
Q

What do Debit inputs consist of? (DEAD)

A

Debits

Expenses
Assets
Drawings

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17
Q

What do Credit inputs consist of? (CLIC)

A

Credits

Liabilities
Income
Capital

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18
Q

What is the Accounting Equation?

A

Assets - Liabilities = Capital

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19
Q

What are assets?

A

Things owned by the business

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20
Q

What are Liabilities and Capital in the Accounting Equation?

A

Capital and Liabilities are what are used to fund the assets the business owns.

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21
Q

How is capital calculated?

A

Opening Capital
+ Profit
- Drawings
= Closing Capital

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22
Q

How are is the Net, VAT & Gross organized in the general ledger for a Purchases Day Book?

A

Gross -> Cr PLCA
VAT -> Dr VAT
Net -> Dr Purchases

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23
Q

How are is the Net, VAT & Gross organized in the general ledger for a Sales Day Book?

A

Gross -> Dr SLCA
VAT -> Cr VAT
Net -> Cr Purchases

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24
Q

What are the stages of the Accounting System?

A
  1. Financial Transactions
  2. Financial Documents
  3. Books of Prime Entry
  4. The ledgers (double entry)
  5. Trial Balance
  6. Financial Statements
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25
Q

Explain the stages of the Accounting System

A
  1. Financial Transactions - An exchange of goods, services or assets for payment
  2. Financial Documents - Evidence of a transaction
  3. Books of Prime Entry - Gathering and summarising accounting information
  4. The ledgers (double entry) - Record dual aspect of business transactions
  5. Trial Balance - Arithmetic checking of double-entry bookkeeping
  6. Financial Statements - SoPL / SoFP
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26
Q

What is a trial balance?

A

A Trial Balance is a list of general ledger account balances.

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27
Q

How is the SoPL Calculated?

A

Income - Expenses = Profit or Loss

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28
Q

How is the SoFP Calculated?

A

Assets - Liabilities = Capital

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29
Q

What does the SoPL show?

A

Performance for an accounting period (part of double entry bookkeeping).

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30
Q

What does the SoFP show?

A

Financial position as at the end of an accounting period.

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31
Q

What is the Adjustment Column in an Extended Trial Balance usually used for?

A
  1. Irregular Transactions
  2. Correction of Errors
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32
Q

What changes must be made to the accounts at the end of the year?

A

All Income and Expenses Accounts are closed off (transfer to SoPL)

All Assets, Liabilities & Capital Accounts are balanced and carried forward.

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33
Q

What is Cash Accounting?

A

Record transactions only when cash is paid or received

34
Q

What is Accrual Accounting?

A

Recording transactions as and when they occur, regardless of whether cash is paid or received.

Match Income and Expenses incurred for the same period.

35
Q

How are Accruals and Prepayments input?

A
  1. Accrual on Expense: Dr Expense / Cr Accrued Expense (current liabilities)
  2. Accrual on Income: Cr Income / Dr Accrued Income
  3. Prepaid Expense: Cr Expense / Dr Prepaid Expense
  4. Prepaid Income: Dr Income / Cr Prepaid Income
36
Q

What is the General Principle for Accruals and Prepayment?

A

Accruals increase the Income or Expenses Account.

Prepayments decrease the Income or Expenses Account.

37
Q

What must always be done at the start of a new year?

A

All Accruals and Prepayments must be reversed.

38
Q

Where does the closing inventory of the SoPL go in the extended trial balance?

A

Credit

39
Q

Where does the closing inventory of the SoFP go in the extended trial balance?

A

Debit

40
Q

What is the three step process in accounting for Capital transactions?

A

1.Acquisition
2. Usage (depreciation)
3. Disposal

41
Q

What is the cost of an asset made up of?

A

Purchase price + Attributable costs.

42
Q

What are some attributable costs of an asset?

A
  • Delivery costs
  • Setup costs
  • Assembly costs
  • Installation costs
  • Testing costs
  • Professional Fees (surveyors, lawyers etc.)

Forms of revenue expenditure cannot be classed as attributable costs e.g. servicing, maintenance, running costs etc.

43
Q

What is a Journal?

A

It is a Daybook for irregular transactions.

44
Q

When can VAT be included in depreciation

A

Only if the business is not VAT registered, as registered businesses would just be able to claim the VAT back.

45
Q

What is the role of a Financial Accountant?

A
  • Recording financial Transactions
  • Maintaining Accounting Records
  • Producing Accounts / Reports
46
Q

What is the role of a Management Accountant?

A
  • To obtain information about costs
  • To interpret and prepare reports for owners/managements decision making, planning and control.
47
Q

Is the Purchases Ledger Control Account a Debit or Credit Account?

A

Credit

48
Q

Is the Sales Ledger Control Account a Debit or Credit Account?

A

Debit

49
Q

What Errors can be shown in a Trial Balance

A
  • Calculation errors
  • Single Entry
  • Two Debits or Credits
  • Different Amounts
  • Incorrect transfer to Trial Balance
  • Missing Account
50
Q

What is the difference between a SoPL and SoFP?

A

A SoPL shows the profitability and performance of a business during an accounting period.

A SoFP shows what a business is worth (financial position) at the end of the accounting period. They are prepared by an Extended Trial Balance.

51
Q

How are Accounting Periods linked in the two Financial Statements?

A

A SoPL covers a specific period, and a SoFP shows the state of the business on the last day of that period.

“SoPL for the year ended 31st March 2024”
“SoFP as at 31 March 2024”

52
Q

What does an Extended Trial Balance include?

A
  • Period End Adjustments
  • SoPL - Part of Double Entry Bookkeeping
  • SoFP - List of Account Balances
53
Q

What Adjustments may be made in a Trial Balance?

A
  • Accruals
  • Prepayments
  • Depreciation/Amortisation
  • Irrecoverable Debts & Allowance for Receivable Debts
  • Inventory
54
Q

What is the 6 Step process in completing an Extended Trial Balance?

A
  1. Complete Trial Balance and ensure it balances
  2. Deal with any adjustments - make sure debits & Credits balance
  3. Transfer to SoPL (Sales, Purchases, Expenses and Opening Inventory)
  4. Transfer to SoFP (Assets, Liabilities, Capital and Drawings
  5. Balance the SoPL Account - If the figure is a Debit = Profit / Credit = Loss
  6. Complete the Double Entry in the SoFP - both columns should balance.
55
Q

What happens to the accounts at the Year-End?

A
  • Income & Expenses Account Balances transferred to SoPL
  • Balances reset to 0 for new year (except for inventory, accruals and prepayments)
  • Balances on SoFP carried forward
  • After income & expenses accounts and SoPL completed, the Profit/Loss is transferred to owners capital account in SoFP
56
Q

What does the Capital Account involve?

A

The capital account is the amount the owner has invested in the business.

Derived from the following accounts in the Trial Balance:
- Capital Introduced
- Profits for the year (or losses)
- Drawings

Does not appear on the Extended Trial Balance.

57
Q

What is an Accrual of an expense?

A

The amount due for an accounting period for which the expenses have not yet been invoiced or accounted for.

Dr Expenses (SoPL)
Cr Accruals (SoFP - Current Liability)

An accrual of an expense reduces profit (SoPL) and Increases Liability (SoFP)

58
Q

What is a Prepayment of an Expense?

A

A payment made in advance.

Prepayments are deducted from expenses so:
- Cr Expense a/c (SoPL)
- Dr Prepayment a/c (Current Asset in SoFP)

A Prepayment will increase profit and increase assets

59
Q

What is an Accrual of Income?

A

Goods or Services delivered but not yet paid for.

In Adjustment column:
Dr Accrued Income (Current Asset SoFP)
Cr Income (SoPL)

Increases profit (SoPL) and Increases Assets (SoFP)

60
Q

What is a Prepayment of Income?

A

Income paid in advance.

Adjustment:
Dr Income (SoPL)
Cr Prepaid Income (SoFP - Current Liability)

Reduces Profit and Increases Liability

61
Q

How to account for Private Expenses and Goods for own use

A

Expenses: (where there is an element of private and business use)
- Dr Drawings a/c
- Cr Expense a/c

Goods for Own use:
Dr Drawings a/c
Cr Purchases or Sales a/c

62
Q

What is Receipts & Payments Accounting?

A

Deals only with receipts and payments made in the period

63
Q

What is Income & Expenditure Accounting?

A

Include credit sales and purchases.

64
Q

What is the Accruals Principle of Accounting?

A

Matches income and expenses relating to the same accounting period regardless of when payment or receipts are made.

65
Q

Which accounting standard sets out the rules for Depreciation?

A

International Accounting Standard (IAS) 16

66
Q

Which Non-current assets must be depreciated according to IAS 16?

A

All non-current assets that have a known useful life are to be depreciated

67
Q

What depreciation methods can be used?

A

The Straight-line method
Diminishing (reducing) Balance

68
Q

What is depreciation?

A

Depreciation is the estimated amount of loss in the value of non-current assets over its useful life.

69
Q

How is depreciation recorded?

A
  • As a non-cash expense (SoPL)
  • Non-current asset and Accumulated Depreciation
70
Q

What is the Straight-Line method of calculating depreciation?

A

A fixed percentage or fraction is written off the original cost of the asset each year.

71
Q

What is the Diminishing (reducing) Balance method of calculating Depreciation?

A

A fixed percentage is written off the diminished balance (i.e. the Carrying Amount) of the asset each year.

72
Q

How is the Carrying Amount calculated?

A

Carrying Amount = Cost - Accumulated Depreciation

73
Q

What does the term “Useful Life” mean?

A

Useful Life is the number of years the company expects to use the asset.

74
Q

What does the term “Residual Value” mean?

A

Expected (resale) value of the asset at the end of its life.

75
Q

What does a Depreciation % mean?

A

The rate of depreciation as a % of either cost (Straight-Line) or Carrying Amount (Reducing Balance)

76
Q

How is the Annual Depreciation calculated in Straight-Line Depreciation?

A

(Cost of Asset - Residual Value) / Useful Life of Asset

77
Q

What is the Units of Production method of calculating Depreciation?

A

Depreciation is calculated based on output (e.g. units, hours or miles)

78
Q

Features of Straight-Line Depreciation

A
  • Same Depreciation Charge every year
  • Lower Depreciation % required to reach residual value
  • Best used for assets with nil/low residual value
79
Q

Features of Reducing Balance Depreciation

A
  • Reducing Depreciation Charge every year
  • Higher Depreciation % required to reach residual value
  • Best used where assets lose high value in early years
80
Q

What is the process of accounting for non-current assets?

A
  1. Acquisition of Non-Current Asset
  2. Depreciation (usage)
    - Straight-Line
    -Diminishing Balance
  3. Disposal
    - Cash or Credit
    - Part Exchange
81
Q
A

Accounting AAT Level 3 (4 decks)

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