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Intro into Accounting Flashcards

(73 cards)

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1
Q

Capital Expenditure

A

Expenditure on the purchase, alteration or improvement of a NCA: (LIDIC)
Legal costs of buying property
Installation of NCA
Delivery of NCA - ‘carriage’
Improvement (not repair) of NCA
Cost of NCA (incl wages paid for installation/ improvement of NCA)

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2
Q

Capital income

A

Income from the sale of a NCA

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3
Q

Revenue Expenditure

A

Expenditure on running costs
(MITRA) :
Maintenance
Insurance
Training
Repair of NCA
Any other running costs associated with the business

Expenses or COS on I.S

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4
Q

Revenue income

A

Sales revenue from providing goods and services and other income-> interest , rent & commissions received

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5
Q

Name the types of books of original entry

A

Sales day book —> for credit sales
Purchase day book —> for credit purchases
Returns inwards day book —> for returns inwards
Returns outwards day book —> for returns outwards
Cash book —> for receipts and payments for cash & cheques
General journal—> for all other items

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6
Q

Terms used in a limited company income statement

A

Profit from Operations- Gross profit + Other income - Expenses
Finance cost is Interest Payable on NCL such as bank loans
Tax is the corporation tax on profit made by the company this year
Profit for the year = Operating Profit- Finance Costs- Tax

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7
Q

Explain one limitation of the purchase ledger control account and give one example

A

The PLCA verifies the arithmetical accuracy of the ledger, but doesn’t prove that each individual account balance is correct.
E.g Error of Omission: where a transaction has been completely omitted from the records

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8
Q

Give the benefits of preparing a PLCA

A

Give the total trade payable —>useful for preparing financial statements and trial balances.
Checks arithmetic accuracy —>compares total balance on account with total on individual balances on personal account.
Prevents fraud —>would have to tamper with both the purchase ledger and the CA

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9
Q

Explain how the PLCA can be used to verify the balances in the purchase ledger

A

The balance on the PLCA should agree with/ the total of the individual account balances

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10
Q

Business paid for his family’s holiday from the business bank account and recorded the payment as drawings. Which account and concept has been applied?

A

Business entity

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11
Q

Example of business entity concept

A

A car bought for private use can’t be claimed as an asset on the balance sheet and cannot be depreciated on the profit and loss. If the business was to purchase the car and then it was solely used for personal use then the car would have to be taken as a drawing by the owner.

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12
Q

List the errors which do affect the trial balance

A

PUPAT
Posting - where there’s 2 debit (or 2 credit) entries

Unequal posting - the dr side of the posting doesn’t equal the credit side

Partial omission - one side of the transaction not posted

Addition - in the trial balance /ledger account over/understating figures in one account

Transportation - e.g one entry posted as £67, the reverse entry posted as £76

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13
Q

Name the accounting concepts

A

Cost ,going concern, accruals, consistency, prudence, materiality, realisation, business entity, duality, money measurement

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14
Q

Identify four items contained in the annual report and accounts of a limited company other then the profit and loss accounts and balance sheet

A

Directors reports
Auditors report
Cash flow statement
Notes to the accounts

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15
Q

Why does a trial balance balance?

A

All the debit and credit entries are equal to one another -there’s a debit to every credit

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16
Q

How might it be possible for a trial balance to not balance?

A

When the debit and credit entries haven’t been added up properly and therefore are not equal to one another

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17
Q

State one purpose of cash and trade discounts

A

Cash discount is given to encourage prompt payment .
Trade discount is given to encourage bulk purchase/or to encourage repeat customers

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18
Q

Define depreciation

A

A fall in value of a fixed asset due to wear and tear, etc

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19
Q

Give the purpose of control accounts

A

CA must balance with The total of the individual accounts
checks for errors
minimises the potential for errors and localises errors to the general ledger

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20
Q

Define control accounts

A

An account in the main ledger which summarises the transactions in a number of other accounts

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21
Q

Define nominal value and market value

A

Nominal value - the face value of shares that shown on SOFP as part of total equity
Market value - the price at which shares that’ve previously been issued or traded I.e showed to new shareholders -not shown on the SOFP

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22
Q

Explain the main purpose of the cashbook

A

To keep track of funds flowing into and out of the business

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23
Q

Define source document

A

evidence of a transaction ,produced for each and every transaction, to ensure accuracy and limits potential for fraud or bias

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24
Q

Define social accounting

A

The process of communicating the social and environmental effects of businesses

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25
Define stakeholder
A party that takes an interest in an organisation as they can effect of be affected by business’ performance
26
Name the stakeholder of financial accounts
Managers, customers, employees, suppliers, government, investors and shareholders, lenders & competitors
27
Irrecoverable debts
An account owing from a customer, which has to be written off in the account because the customer doesn’t have the funds to pay the debt
28
Dividends paid
Number of shares x Dividends per share No of shares = share capital / nominal value of each share Worked example: 100,000 shares each receiving a dividend of £0.04 Dividend paid= 100,000 x £0.04 = £4000
29
What goes on the debit and credit side of PLCA
Dr: Returns Outwards Cash/ cheque paid to suppliers Discount received Contra Cr: Opening balance Total of all credit purchases Dishonoured cheque by US (+ discount)
30
What goes on the debit and credit side of SLCA
Dr: Opening balance Total of all credit sales Dishonoured cheque from customers (+ discount) Cr: Return inwards Cash/cheque received from customers Discount Allowed Contra Irrecoverable Debt Receipts from customers
31
Partnership income statement & appropriation accounts
Identical to sole trader IS . After the PFTY: SUBTRACT interest on partners’ loans from the PFTY Complete the appropriation account: + Interest charged on partners’ drawings - Salaries paid to any of the partners - Interest on partners’ capital account The remaining profit/loss is SHARED between the partners
32
What goes on the debit and credit side of a Current Account
Dr: Share of loss Drawings/ Goods for own use Interest on Drawings Bal C/D Cr: Bal b/d (if POSITIVE) Share of profit Salary/commission Interest on capital Interest on loan
33
Other adjustments to gross profit- GTFOU, NCA wrongfully included in purchases, Reducing inventory value- effect on Income Statement
Goods taken by the owner for their own use will INCREASE GP= DECREASES C.O.S NCA wrongfully incl in purchases = INCREASE GP = DECREASE COS. Reducing the value of closing inventory will DECREASE GP = INCREASES COS.
34
Define prepayment
A payment made in advance of the current period
35
Explain the following accounting terms: accrued expenses, prepaid expenses, cost of sales
Accrued expenses: business cost which are due but unpaid at the end of the current accounting period. Prepaid Expenses: an expense that’s been paid in advance which relates to the next accounting period. Cost of sales: the cost of goods actually sold in the current accounting period after adjusting purchases for opening and closing inventory.
36
NCA is wrongfully included in purchases or expenses
Debit (increase) the cost of the NCA on the SOFP Credit (decrease) ‘purchases ‘ or the expense on the I.S
37
Give the partnership act 1980
When no partnership agreement exists: 1. partners must contribute equal amounts of capital 2. 5% loan per annum 3. No interest on drawings 4. No interest on capital 5. No salary 6. Profits and losses are to be shared equally.
38
What goes on the debit and credit side of Profit and loss appropriation account
Dr: Interest on Capital Partners’ salaries Bonus paid to partners Share of profit Cr: Net profit from P&L account (b/d fig) Share of loss Interest on drawings Double entry to the current account
39
State what is found in both the sales and purchase ledger
Sales ledger: all of our trade receivable accounts purchase ledger: all of our trade payable accounts
40
Name the five steps involved in the accounting cycle
1.Source documents 2.books of original/prime entry 3.ledgers/ double entry accounts 4. trial balance 5.financial statements
41
What are the objectives of accounting?
To let people/organisations know : if they make a profit or loss what their business is worth how much they owe/ are owed how much cash they have what a transaction is worth to them
42
Give the benefits of social auditing
Govs can use it to decide on legalisation/regulation Valuable information to pressure groups and consumers Allows managers to gain a complete picture of the impact of the businesses activities
43
State a few reasons why it is essential for a business to keep accurate accounting records
To produce accurate records ensuring you aren’t under/overpaying to understand manage and control debts helps in detecting thefts within the business itself provides management more information to base business decisions on
44
Define returns inwards and returns outwards
Returns in :when an item is returned the item returns as stock and there is no profit made return outwards :stock that won’t sell/no longer need so you return it to the supplier
45
Describe what is meant by a contra entry
Arises if a business sells goods to and also buys goods from the same trader
46
Name the 7 sources of finance
Owners capital partners capital share capital debentures bank loans mortgage bank overdraft
47
Define credit transfer
Amounts paid into and out of an account directly through the banking system instead of by issuing a cheque
48
Define accounting
The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information
49
Describe trade discounts
Discounts given to companies who trade in the same area or are bulk buying. They are NOT recorded in the double entry system
50
Identify two uses of the general journal
Correction of errors Transfer of amount from one general ledger account to another Transfer of opening balances
51
State who owns a private limited company
Shareholders
52
Explain the term limited liability
When the owner and the company are separate entities
53
State who is responsible for the day-to-day management of a private limited company
Director
54
Define outstanding lodgements
Payments made to us by debtors that we have entered into the cashbook which the bank has yet to receive
55
Define unpresented cheques
Cheques we’ve made and sent to our suppliers, however the amount has yet to be taken from my bank
56
Define dishonoured cheques
Cheque which have been entered into the books, but when presented to the bank, the payee doesn’t have enough money to make the cheque
57
Define accruals
An estimate of money that’s owed, but which has not yet been paid
58
Describe the role of the trial balance
It checks that each transaction has been entered once on the debit side of an account and once on the credit side of another account. It is used to prepare the income statement and balance sheet.
59
Define standing orders
amounts paid from one bank to another on a regular basis the amount can NOT be changed by the receiver
60
Define social auditing
A process of reporting on, collecting evidence or improving a businesses performance to ensure it’s making an effect on society
61
Explain the main purpose of the purchase day book
To keep a record of all invoices received from credit suppliers
62
Define the accounting term: trial balance
A summary of all the entries in the double entry system
63
Define direct debit
Amounts paid from one bank to another on a regular basis, the receiver of the money has the ability to request that the amount taken each month is changed
64
Explain why the balance is shown as a debit in Emma’s records but is shown as a credit on the bank statement
The cash book is prepared from the business’ viewpoint and represents an asset. The bank statement is prepared from the bank’s viewpoint and represents a liability.
65
State three benefits which Emma can expect from keeping full account records
Reduces chance of fraud (by checking if cash stolen) To aid effective decision making Provide support for bank loan applications
66
Which documents are required to set up a limited company
The Memorandum of Association The Articles of Association (Submitted to Companies House)
67
Terminology used in a limited company SOFP
Authorised share capital- the max share capital that a company can issue (isn’t apart of the total Equity calculation) Issued share capital- the amount of share capital that a company has issued shown at nominal value Capital reserves ( revaluation reserve & share premium) are created because of non trading profit Revaluation reserve - created when a NCA is revalued at higher value than was previously e.g if land is revalued from £350k to £400k, the £50k increase is ADDED to the R.R Share premium- created when shares are issued at a higher amount than their nominal value Revenue reserve- (retained earnings) the accumulated profits from trading activities that’ve been retained in the company rather than paid out to shareholders
68
Financial Considerations when deciding which investment to choose
Which has the shorter payback and would be less risk. The availability of finance from the banks and share issue - gearing. How much an investment will be worth at the end of the project - residual value.
69
What does a Low NPV indicate
The project isn’t expected to make much money compared to what was invested -> suggests profits are small , high risk and there are better ways to spend the money -> investors may not see it as worth it
70
Cost of capital
Used to calculate how much our money will reduce in value each year- used instead of inflation as inflation is too volatile. The % shows our money is losing value by that amount each year. Total cost of capital per annum/ total nominal value.
71
Explain two ways in which the sales ledger control account can act as an aid to managing the business
Assists in the prep of final accounts , saving time, by identifying the total debtors. Provides instant management information of total debtors, aiding the preparing of financial statements.
72
Explain how the sales ledger control account should be used to verify the balances in the sales ledger
The balance on the control account should agree with the totals of the individual accounts in the sales ledger. If these don't agree it indicates an error in either the sales ledger or the control account or both.
73
Many businesses sell good on credit to their customers. Explain one reason why it is important for these businesses to make a provision for doubtful debts
Prudence concept Anticipating the loss due to some trade receivables not meeting their future obligations. Prevent overstating profits. Prevent overstating the value of their assets

Accounting (12 decks)

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