nguyp035's version from 2016-05-21 15:15

Section 1

Question Answer
To increase only...CREDIT
Liabilities (e.g. accruals are a liability . to increase liability we credit the accruals account)


Section 2

Question Answer
Types of accounts:
Assets are... (what we own)land and buildings, plant and machinery, vehicles, hardware, inventory, trade receivables, prepayments cash
Liabilities are... (what we owe)bank overdraft, trade payables, taxes owing, accruals, loan and mortgages, capital
ExpensesPurchases of inventory, wages & salaries, rent and rates, insurance, postage and stationary, maintenance, loan interest
RevenueGenerated from the sale of goods and services. Rent received and also interest receivable = revenue

Section 3

Question Answer
Income statement is a measure performance i.e. how well the business is doing
Profit is measured in which two stages?Gross profit (Revenue - Cost of sales) & net profit
where Cost of Sales/COGS =
(Opening Inventory + Purchases) - Closing inventory
where Net Profit = Gross profit - Overhead expenses (may need to add interest received)
Titling the income statement...Income statement for year ended XX-MM-YY

Section 4

Question Answer
Balance sheet is a measure position. - it gives an indication of the financial well-being of the business
The balance sheet is an expression of the equation...Assets = Liability + Capital

Section 5

Question Answer
Non current assets are...permanent assets - tend to be high value - infrequently purchased - retained for at least 1 year - provides the infrastructure of business (e.g. plant & machinery)
Current assets are...constantly changing (aka circulating assets) - circulates around cash, trade rec & inventory - order in which asset appears starts off with most permanent
Current liabilities are...the debts of a business that will become due for payment within 1 year e.g. payables & overdraft
Non-current liabilities are...the debts of a business that will become due for payment in more than one year e.g. bank loans/debentures
Capital...owners capital is a liability of the business as it represents the business's indebtedness to its owner(s)
so... NCA + CA =CL + NCL + CAPITAL
Net asset =Assets - liabilities

Section 6

Question Answer
Accounting concepts are important because...they provide us with a set of PRINCIPLES and GUIDELINES on how to TREAT items in our accounting system. - 4 concepts exist
PrudenceConcerned with being CAREFUL to ensure that we do not OVERSTATE the profit figure in the income statement. We must 1) include all expenses that have been incurred (even if we haven't received invoice) 2) anticipate and include future losses (include them in the income statement now) - 3) delay recognizing profits until sure of them
Prepayments takes costs out - It is not prudent but is matching - there is a conflict.
Matching (Accruals)Concerned with ENSURING all revenues and expenses are credited and charged to the correct ACCOUNTING PERIOD (not simply when cash is received or payment made) thus, some items will represent last years cash flow (payment)
Consistency1) Treating similar items the same way in the accounts (printer and ink cartridges as computer consumables) - 2) Having selected an accounting policy e.g. on depreciation, we apply it consistently each year
Going-concernThe assumption that the business will remain in business indefinitely (or atleast until next year balance sheet date) - need to be able to pay non current liabilities - directors of limited companies must state if business is a going concern

Section 7

Accounting statements - ADJUSTMENTS
Question Answer
Statements are produced from...the trial balance
Trial balances represents..current state of play at the close of business (end of accounting period)
The following adjustments take place after trial balance is drawn1) Closing inventory 2) Accruals and Prepayments 3) Provision for depreciation 4) Provision for bad / doubtful debt

Section 8

Question Answer
Closing inventory is established by..physical stock take at the end of the period
Closing stock is valued at..cost i.e. historic price paid unless NRV (what it can be sold for after selling expenses) is less than the cost, which it then is valued at NRV
DebitClosing inventory (asset in the balance sheet)
CreditTrading account (I/S) - deduct from opening inventory + purchases

Section 9

Question Answer
Accruals are...expenses that have been incurred/used, but not accounted for within the accounting system
Examplesgas, electric, phone expenses (service ALREADY CONSUMED before invoice is received)
If....actual amount is unknown... but create a provision.
DebitIncome statement (add to expense)
CreditBalance sheet (list as current liability

Section 10

Question Answer
Prepayments are..expense that have been accounted for but not yet occured/used - paid in advance
That is...the service provided by the expense has NOT yet been CONSUMED e.g. Rent, insurance, stationary
CreditIncome statement (deduct from expense)
DebitBalance sheet (list as current asset)

Section 11

Question Answer
Depreciation is....the reduction in the value of an asset overtime - due to wear and tear and becoming obsolete
DebitIncome statement (charge as expense)
CreditBalance sheet (provision for dep of... account) - add to trial balance dep figure if any.

Section 11

Question Answer
T AccountsUsing both pages to record
General rules
A debit entry represents..Increase in an asset / Decrease in liability / An item of expense
A credit entry represents..An increase in liability / Decrease in asset / An item of income
Annual dep'n total =charged against profit in I/S
Total aggregate dep figure (balance on prov for depn account) deducted from non current asset at cost figure in B/S
i.e. the figure that we arrive at on the prov for dep account when we have balanced it is the figure we use to takeaway from the actual cost of the item, giving us its new value on the B/S.
Depreciation methods
1 Straight-line: Same charge for dep each year (consistent)
Question Answer
charge expressed as a % of original cost, based on life expectancy of asset
if asset has residual value at the end (salvage), it should be taken into account
Formula(Cost - Residual (scrap) value) / no. of operational life (if specified) OR multiply item by %
2 Reducing or diminishing balance methodAnnual dep charge based on the dep or net book value of the asset
main feature is that charge starts HIGH and reduces every year (not consistent) , some residual value will remain
suitable for assets that lose a high proportion of their value in early years
Formula(Asset cost - NBV) x Dep%
where NBV = cost - total depreciation to date
Layout on balance sheetNon-current assets > Cost | Dep'n to date | Net book value

Section 12

Question Answer
A provision for bad debt estimate of the year end trade receivables that will fail to pay and become bad next year
can be specific(specific customer) or general
usually expressed as a % of trade receivables
DebitIncome statement (increase in provision)
CreditBalance sheet (Provision for bad debt account)
NoteThe entire provision (balance on provision account) is deducted from trade receivables in the Balance sheet
When provision is larger that needed..we will be able to release part of it, increasing profit.
DebitBalance sheet (provision for bad debt)
CreditIncome statement
entries for provision of bad debt is separate from and in addition to entries for writing off actual bad debt
Exampleprovision of bad debt 5% of TR
TR = 400k
Increase in prov for bad debts 20k (expense) so increase in prob'n for bad debt 20k expense.

Section 13

Question Answer
Inventories IAS2Inventories should be valued at lower purchase cost and NRV (estimate sale proceeds net of selling costs)
Stock Systems
Periodic means..only records purchases of stock DURING ACCOUNTING PERIOD. Stock count occurs AT END. Continuous record of stock on hand NOT KEPT
Perpetual means..CONTINUOUS record of quantity and cost of stock MAINTAINED, flow of units RECORDED. Stock count at least once a year
Stock flow assumptions (Valuation)..methods are used to value inventory based on the prices we bought them at... required to calculate COS (accurate)
FIFO (perpetual)first in first out (the assumption that the inventory purchased first will be leaving first)
WAC (perpetual)Weighted Average cost (with each purchase, we recalculate the Avg cost)
issues of goods remain at that figure until we sell more
How?We would find avg cost last by finding total value first / units (when we purchased more)
Valuation of inventory and calculating COS & GROSS PROFITLayout
SalesTotal issued
PurchasesTotal received
Closing stockValue of inventory left over after using FIFO / WAC
COSthat is Sales + Purchases - Closing stock
Gross profit Sales - COS
Comparing FIFO & WAC
Fifo advantagessimple and logical, may link to physical flow (perishable), up to date closing stock figures for BS, Accepted by IAS2 HMRC & UK
Fifo drawbacksdoes not follow matching concept, outdated cost figure if rising prices
Wac advatangesfair method by smoothing price fluctuations, avoids extremes of profit and stock, links to physical flow when stock mixed together, Accepted by IAS2 HMRC
Wac drawbackscomplex calculations, computerized systems manage calculations