IOB1/CH3: Basic Accounting

Question 1

in terms of accounts and performance, why might owners/share holders have an interest in a businesses accounts?

Answer 1

to work out the level of return they’re receiving on their investment so they can decide to keep or sell

Question 2

in terms of accounts and performance, why might suppliers have an interest in a businesses accounts?

Answer 2

to work out if they’re likely to be paid if they offer credit to a company

Question 3

in terms of accounts and performance, why might banks have an interest in a businesses accounts?

Answer 3

identifying if a company is a good credit risk for agreeing a loan request

Question 4

in terms of accounts and performance, why might staff have an interest in a businesses accounts?

Answer 4

security for their jobs and income and wether they are likely to get a bonus based on company performance and success

Question 5

in terms of accounts and performance, why might customers have an interest in a businesses accounts?

Answer 5

to check a company is still trading in a year or two when the customer wants to buy further supplies

Question 6

define the ‘accounting system’

Answer 6

*a business will have many transactions daily and these must be recorded accurately and logically
*to enable accounts to be produced at the end of the financial year to summarise all transactions and the position of the business

Question 7

what are the aims of the accounting system?

Answer 7

*identifying the performance and the financial position of the business at the end of a period
*identifying what the business owns and owes
*understanding cashflow of the business
*to communicate the accounts as clear as possible

Question 8

define ‘assets’

Answer 8

something owned by the business
eg. property, machinery, vehicles

Question 9

what are the two types of assets?

Answer 9

*fixed: assets owned 1+years, machinery
*current: assets owned less than 1 year, stock

Question 10

define ‘liabilities’

Answer 10

something owed by the business
eg. bank loan, rent

Question 11

define ‘income’

Answer 11

sales made by the business
(also known as revenue, turnover)

Question 12

define ‘expense’

Answer 12

costs incurred by the business

Question 13

define ‘trade payables/debtors’

Answer 13

someone who the business owes money to (credit supplier)

Question 14

define ‘trade receivables/creditors’

Answer 14

someone who owes the business money (credit customer)

Question 15

what is expenditure? and what are the two types?

Answer 15

*money going out
*capital and revenue

Question 16

define ‘capital expenditure’

Answer 16

spending money on an asset that will be owned for more than 1 year
eg. machinery

Question 17

define ‘revenue expenditure’

Answer 17

spending money that will only affect the business short term
eg. salaries

Question 18

what is income? and what are the two types?

Answer 18

*money coming in
*capital and revenue

Question 19

define ‘capital income’

Answer 19

generating income by selling an item that was treated as capital expenditure when purchasing
eg. selling an old machine

Question 20

define ‘revenue income’

Answer 20

generating income through daily sales, cash or credit

Question 21

what is the aim of ‘accounting system’

Answer 21

to produce accounts and financial statements

Question 22

what are the two main financial statements?

Answer 22

*statement of financial position
*statement of profit or loss

Question 23

what makes up a statement of financial position?

Answer 23

assets owned and liabilities owed

Question 24

what is an SFP also known as?

Answer 24

a balance sheet

Question 25

how is an SFP split?

Answer 25

2 halves *top half is the total of assets and liabilities *bottom half is owed to the owner

Question 26

in the SFP what is the owner known as?

Answer 26

the proprietor

Question 27

what makes up the statement of profit or loss?

Answer 27

total income and total expenses

Question 28

what is the statement of profit or loss also known as?

Answer 28

*P&L account *trading & profit & loss account

Question 29

what do both financial statements measure?

Answer 29

*SFP - position of the business *P&L - performance by profit generated

Question 30

what is the link between both statements?

Answer 30

the net profit earned in a year belongs to the owner, this figure is taken from P&L and added to the proprietor's interest on SFP

Question 31

what is the accounting equation?

Answer 31

+ A + C - L assets - liabilities = capital (proprietors income)

Question 32

what are cash transactions usually accompanied by?

Answer 32

a receipt, a till roll or cheque book stub

Question 33

what are credit transactions usually accompanied by?

Answer 33

an invoice - a demand for payment with credit period stated

Question 34

most financial transactions are accompanied by a financial document, what is this called? and what does it begin?

Answer 34

*original/primary/source document *the flow of information

Question 35

what is the first step in the flow of information?

Answer 35

record transactions in the 'books of prime entry' (BoPE)

Question 36

BoPE: define what transactions would go in to cash receipts?

Answer 36

all receipts IN to the bank accounts *includes payments by customers or proceeds of selling assets

Question 37

BoPE: define what transactions would go in to discounts allowed day book?

Answer 37

any prompt payment discounts that customers have taken advantage of

Question 38

BoPE: define what transactions would go in to cash book payments?

Answer 38

all payments OUT of the bank accounts *includes BACS payments runs and cheques written to suppliers or to the landlord for rent

Question 39

BoPE: define what transactions would go in to discounts received day book?

Answer 39

all prompt payment discounts that have been taken up from suppliers

Question 40

BoPE: define what transactions would go in to sales day book?

Answer 40

all sales made on credit *sales invoices sent to credit customers

Question 41

BoPE: define what transactions would go in to purchases day book?

Answer 41

all purchases made on credit *purchase invoices received from credit suppliers

Question 42

BoPE: define what transactions would go in to sales returns day book?

Answer 42

to record returns of goods by customer *all sales credit notes issued

Question 43

BoPE: define what transactions would go in to purchases returns day book?

Answer 43

to return goods to supplier *all purchase credit notes recieved

Question 44

BoPE: define what transactions would go in to journal book?

Answer 44

various transactions not in any of the above

Question 45

BoPE: define what transactions would go in to petty cash book?

Answer 45

records small cash transactions paid for out of the petty cash tin *purchase of stamps

Question 46

BoPE is the first step of the flow of information, what happens next?

Answer 46

once data has been collected in these books, data is then transferred to the general ledger

Question 47

what is the 'general ledger' also know as?

Answer 47

'nominal ledger' or 'main ledger'

Question 48

what does the general ledger have to do accounts for?

Answer 48

an individual account for each transaction *record of sales *record of purchases *record of rent

Question 49

what are each of these separate records called?

Answer 49

accounts

Question 50

what is double entry bookkeeping?

Answer 50

a system to enter summarised transactions into the general ledger

Question 51

define the trial balance

Answer 51

*at the end of the period, the TB lists the balances of individual accounts from the general ledger *a check on wether entries have correctly been entered into the system *figures from TB will be used to produce financial statements

Question 52

what can be done once the trial balance is completed?

Answer 52

financial statements can be completed as you are in a position to draw up year-end financial statements

Question 53

digital bookkeeping systems: here can data be imported from?

Answer 53

*bank accounts by linking your system to your account *spreadsheets or CSV files *third party software, if you use multiple softwares

Question 54

what are some benefits of digital bookkeeping systems?

Answer 54

*saves time and saves finance staff costs *convenience 'app based' and enables on the go updates *automatic transfers from data books to ledgers/accounts *reduces errors/omissions - a direct import is likely to be more accurate than manually *automatically carries out reconciliations *automatically produces TB - owner can create a snapshot in real time of finances *entries can be duplicated in order to save time - recurring payments eg. rent

Question 55

what are some drawbacks of digital bookkeeping systems?

Answer 55

*systems are only as accurate as the data inputted into them * a risk of becoming too trusting of digital systems - manual checks are recommended *they can create errors if not set up correctly