Semester 1 Flashcards

Question

What is the process of double entry book keeping?

Answer 1

Once all transactions for a period have been entered into T accounts —> The balance on each account is entered into a trail balance —> Entries in trail balance are used to prepare financial statements

Answer 2

Assets - liabilities = capital + revenue - expenses

Answer 3

Assets + expenses = capital + revenue + liabilities

Answer 4

Debit - to receive, value recieved | Credit - to give, value give

Answer 5

- Records the money kept at bank by the entity. | - shows receipts and payments includes cheques, standing orders and direct credit and debits

Answer 6

Similar to the bank accounts, except that it exclusively refers to notes and coins being transferred into and out of the business

Answer 7

- Also referred to as owners equity - record the contribution made by the proprietor(owner) to the entity. A special type of liability arising from the business entity principle

Answer 8

Arises when the entity sells good/renders services to customers and grants them credit. The customer later pays the entity, but until this occurs, the amount owed is treated as an asset ( i.e as the payment represents a future benefit)

Answer 9

An account used to show any reduction from the price charged/demanded as a result of prompt payment

Answer 10

An account used to record cash, cheques and goods withdrawn from the business by the owner for personal use

Answer 11

Refers to goods bought with the intention of later resale. It is an expense account. However, notes that the purchases of NCA do not represent purchases - they are recorded in a separate asset

Answer 12

Record the value of goods and serves sold by the entity. Whether the goods have been paid for does not effect their entry in the sales T account - it is the other T account will record the method of settlement

Answer 13

A person whom the entity being accounted for has purchased goods from on credit. For example, suppliers. It is a liability account - I.e amounts the business still owes suppliers in respect of goods but not yet paid

Answer 14

A current asset (I.e purchases made that remain unsold, I.e future benefit, by the end of the accounting period)

Answer 15

A non current asset account for most businesses. Other non current asset accounts land, such as, land and buildings,plant and machinery etc - items which have an enduring benefit to the entity beyond the end of the current financial year

Answer 16

Payments made for services rendered to the entity that help it to earn sales revenues. Separate accounts need to be opened for each expense e.g gas, insurance, wages, advertising etc

Answer 17

- not all resources held by the business can be measured in money - Financial resources exclude resources that cannot be measured in monetary terms such as their reputation and brand

Answer 18

- income statement or profit and loss - statement of financial position (balance sheet) - cash flow statement

Answer 19

A statement of what a company owes and owns on a particular date and should all equal

Answer 20

Asset (bold) - non-current asset - current assets - total asset (bold)

Answer 21

Equity and liabilities (bold) - share capital/owners equity - retained profit - total equity (bold) - non-current liabilities - current liabilities - total equity and liabilities (bold)

Answer 22

- shows liquidity (are we able to meet our obligations e.g. how able are we to pay our debts) - Show mix of asset (have a balance of assets in current and non-current assets) held by business - shows financial structure (how much is funding is from is from the owner as it the least risky source of funding and how much is funded by third party such as a bank loan which is more risky as we have to pay interest in these loans) if business

Answer 23

- shows probable future benefit - business has exclusive rights to control benefit - benefit must arise from past transaction (must of bought that asset it made an agreement in which your paying for it) - asset must be measurable (must be a way of putting a pound sign on the asset e.g. reputation can’t have a pound sign out on it therefore it is not an asset) in monetary

Answer 24

- what the business owes the owner - also known as capital - claim on the assets on the business - no fixed repayments date - the residual amount found by deducting all of the entity’s liabilities from all of the entity’s assets - if the business isn’t a large limited company it’s not called shareholders equity it would be instead called owners equity or capital

Answer 25

- only true on one day e.g. the next day they could take out a large loan

Answer 26

- a business primarily exists to make a profit - purpose of income statement: measure and record profit - PROFIT = revenue - expenses

Answer 27

Opening inventory + purchases - closing inventory

Answer 28

- an expense in income statement - matching cost of asset to revenues asset helps to generate each year - amount of asset ‘used up’ in generating yearly sales and revenue

Answer 29

- cost if assets - the useful life of asset - residual value - choice of depreciation method

Answer 30

- straight line (SL) - reducing balance (RB) - sum of digits (SoD) - units of service (UoS)

Answer 31

- equal annual charge to income statement - easy to calculate and understand - widely used - especially used where asset depletion relates to the passage of time

Answer 32

Cost - residual value ................................... Life of asset (years)

Answer 33

- produces the highest depreciation charge in the first year - each subsequent years depreciation gets less and less - apply the RB rate (will be given this) to the net book value @ the start of the year

Answer 34

- less common - similar depreciation schedule to RB - key digit is the number of years of useful life

Answer 35

Cost - residual value ——————x life at start of year Sum of digits

Answer 36

- depreciation charged is directly related to the assets use (I.e. hours used or units made by the asset) - the more you use the asset in a particular year, the higher the depreciation charged - problem? Estimating actual use in advance

Answer 37

(Cost - scrap) x use in year —————— Total use

Answer 38

- include expenses for which you have had the benefit but have not yet paid - ACCURALS - exclude payments that were made this year but for which the benefit will come in a future period - REPAYMENT - if you incur an expense this year and you are unsure whether it will bring future benefit include expense in this years income statement - PRUDENCE PRINCIPLE

Answer 39

- sales should only be recognised (recorded in income statement) when they have been realised - when the activities to generate the revenue are substantially complete Apply the realisation convention - customers requirements met as per order/contract - customer formally accepts goods/services - legal claim for payments established

Answer 40

- held for resale - in the process of production - in the form of materials and supplies to be consumed in production process or rendering of services

Answer 41

- The way inventory is valued is important | - valuation affects profit and portrayal of organisation financial position

Answer 42

Matching - revenue matched against costs incurred in its generation - need to calculate cost of goods sold

Answer 43

Goods available for sale at start of year

Answer 44

Goods unsold at the end of the year

Answer 45

Basically the money we could get from our inventory when we sell it Or The estimated proceeds from the sale items less the costs of selling these items

Answer 46

- inventory is valued at the lower of cost OR net realisable value - in accordance with the prudence concept - companies should provide for expected losses, but must not anticipate future profits

Answer 47

All costs of purchase, costs of conversion and other costs incurred in bringing inventories to their present location or condition

Answer 48

- assumes that the first goods purchased will be first to sell - at end year, inventory comprises the most recently acquired goods - common and logical e.g. perishable goods - acceptable for UK tax

Answer 49

- assumes that the last goods purchased will be first to sell - sell newest items first - at end-year m, inventory is valued at outdated prices (you are left with the oldest inventory) - less logical than FIFO - acceptable for US tax, but not UK tax

Answer 50

- compromise between FIFO and LIFO - uses an average of all purchase costs in year (but average may not relate to specific prices paid) - no assumptions made re:passage of units through the company - acceptable for UK tax

Answer 51

- amounts paid in advance to suppliers of services - payments made in one accounting period but benefit not received until next year - to achieve matching - must make an adjustment to amount paid

Answer 52

Current asset

Answer 53

A current liability

Answer 54

Current asset section - remove bad debts from trade receivables - show trade receivables minus provision for doubtful debts (show to in brackets under the trade receivables)

Answer 55

Additions to gross profit - Andy decreases in provision for doubtful debts from last year Expenses - any bad debts from last year - any increase in provision flor doubtful debts from last year

Answer 56

Share capital - shareholders invested into large limited companies Owners equity - money the sole trader has invested into the business

Answer 57

Made up of share capital (money from owners) and retained profit?

Answer 58

When putting figures in you must put the asset was worth when bought

Answer 59

In a income statement you must include all bills, we might have not paid them yet but if they helped generate this periods sales revenue they must be included

Answer 60

- customer requirements met per order/contract - customer must have formally accept the goods - legal claim for payment established

Answer 61

- at least 2 people (max 20) in business together with intention to make profit - governed by partnership act 1890 - small - easy to set up - no formal procedures required - partners can agree own arrangements for financial and management aspects of the business - can be restructured/dissolved by agreement between partners

Answer 62

- more capital can be raised with additional partners - additional partners = variety of skills/expertise - responsibility of management is shared - access a bigger network of contacts

Answer 63

- usually partners have unlimited liability - may be responsible for debts of other partners - difficult to raise sufficient capital for large scale operations as increased unlimited liability could be a deterrent to expansion - profits must be shared - control diluted - possibilities of disputes

Answer 64

- capital contribution - profit sharing ratio - interest to be paid on capital before profits are shared - interest to be charged on partnerships drawings - salaries - dissolution/resolution of disputes

Answer 65

- partners salaries and interest on capital are appropriations of profit rather than expenses - any profit remaining after appropriations for salaries and interest is then divided up in the agreed profit sharing ratio (PSR)

Answer 66

SOFP shows capital contribution of school partner Income account shows how profit is appropriated between partners

Answer 67

Capital account - capital introduced by partner (what they are owed by partnership) Current account - balance of profits attributable to each partner - drawings made by partners - interest in drawings - interest on capital - salary

Answer 68

- establish net profit - if interest to be charged on drawings, debit partners current account, credit appropriation account - appropriation interest on and capital and salaries - share out residual profits in profit sharing ratio - credit each partner current accounts with share of profit - debut each partner current account for their drawings against profit

Answer 69

- high risk - no ring fence between personal and business assets - may have to use personal assets to settle business debts - attractive from suppliers point of view - high reward - keep all profits and maintain control

Answer 70

- a limited company is formed by registering with the register of companies - application should give details of company name, where company is registered, names of directors, whether company is public and private - cheap and easy to set up - application to be accompanied by articles of association, statement of capital, memorandum of association

Answer 71

- substantial amounts of capital can be raised because there is no limit to the number of shareholders - a limited company has its own legal identity and therefore is separate to the people who own and manage it - delegation of management function - limited liability - perpetual succession - individual shareholders may change by the company will continue to existence until liquidation

Answer 72

- companies are subject to strict legal control - publicity - there is a lack confidentiality and this may hinder competitive advantage - delegation of management to a few may be detrimental (abuse of power)

Semester 1 Flashcards

(96 cards)