Accountancy 1A

Deferred income + what is it recorded as?

Cash received but not earned - recorded as a liability

What is the journal entry for deferred income?

DR Bank, CR Deferred Income

Accrued Income + what is it classified as?

Revenue that has been earned but not yet invoiced for cash by the end of the accounting period - classified as an ASSET

What is the journal entry for Accrued Revenue?

DR Accrued Revenue, CR Sales

Which accounting standard deals with revenue recognition?

IFRS15

Are estimates/judgements involved in measuring and recognizing assets?

YES - financial reporting based on accruals and future expectations, which is uncertain and requires estimates

Which aspects require estimation/judgement?

Useful life, residual value, Impairment testing, allowance for doubtful receivables, fair value measurement

What principles/ guidelines should be used in making those judgements/estimates?

The conceptual framework - Faithful representation principle, relevance, use of reasonable and supportable assumptions, consistency, neutrality, PRUDENCE, materiality

Creative Accounting

The deliberate manipulation of financial statements within the letter of the law but against its spirit using accounting choices, estimates, presentation techniques etc. to make the financial performance or position look better than it actually is in the best interest of the producers or company

Which presents the greater risk? Asset OVERSTATEMENT or UNDERSTATEMENT?

overstatement - more harmful towards external users, goes against the law seeing as IFRS is designed specifically to prevent it

What is the WAVCO formula?

Total cost of goods available / Total units available

In periods of steadily rising prices,
however, which inventory method will result in the highest closing inventory valuation?

FIFO

Why is LIFO banned in IFRS countries?

It understates assets, profits and costs, thereby not faithfully representing their values

What is Net realisable Value

the estimated selling price of inventory minus the costs of completion and costs necessary to make the sale

How do you make an inventory adjustment when presented with NRV?

DR CoS, CR Inventory with write-off difference between asset purchase cost and NRV

Returns OUT

Business returns goods to suppliers for being damaged, incorrect, etc. They are subtracted from purchases in COS calculation

Returns IN

customers return goods to business - value is subtracted from Sales figure in income statement

Carriage IN

Cost of transporting purchased goods into the business - added to purchases figure in COS calculation

Carriage OUT

cost of transporting goods to customers - considered an operating expense in income statement

Where does other operating income go on an income statement

Added after gross profit

Purchases

Goods bought for resale

What do web development costs classify as in the SFP?

Intangible non-current assets

What is a bank deposit and what does it classify as in the SFP?

cash in bank - current asset

Liability

Present obligation of the entity to transfer an economic resource as a result of past events

What are ANY of the criteria a current liability must satisfy?

• expected to be settled in entity’s normal operating cycle

• held primarily to be traded

• due to be settled within 12 months after SPF date

Debenture

long-term loan issued by a company - written document acknowledging a debt that a company took out from IMVESTORS, not a bank - comes with interest

What is the primary risk concerning liabilities?

UNDERstatement - boots profits

What are the criteria for a liability to be recognized?

1. sufficient evidence exists that a liability has been created

2. cost/value can be measured with sufficient reliability

Bank overdraft + what is it recorded as in SFP?

short-term borrowing allowing business to withdraw more money from bank account than it actually has, thus creating a negative bank balance - CURRENT liability

How is an overdraft created?

No overdraft account - whenever you pay for more than what you have in the bank, you automatically go into overdraft, creating a credit balance for the bank a/c

Accruals

Expenses that have been INCURRED but not yet paid

Prepayments

expenses which have been PAID but not yet incurred

Matching/Accrual concept

Revenue earned during a period needs to be matched with the expenses incurred to GENERATE that revenue, regardless of whether cash is received or paid

Why does matching exist in accounting?

Ensures that profit for period is accurate and faithfully represented, giving TRUE and FAIR view of performance

What is the alternative to the accruals concept and what does it mean?

CASH basis accounting - revenue is recorded only when cash is received and records expenses only when cash is paid

is cash basis used by any business entities or organisations?

YES - but only by very small and typically unincorporated businesses - in the UK only sole traders with turnover under £150,000 can

Provision

Liability of UNCERTAIN timing or amount

What is the journal entry for provisions?

DEBIT Expense account, CREDIT Provision for that account

What happens is a liability does not meet the recognition criteria?

It may be shown as a NOTE in the financial statements but no amount included in the financial statements themselves aka CONTINGENT LIABILITY

Contingent Liability (2 types)

a POSSIBLE obligation that depends on a future uncertain event OR a present obligation that cannot be measured reliably and does therefore not meet the recognition criteria

Which accounting standard sets out the 2 possible types of contingent liabilities?

IAS37

What type of balance is deferred income?

CREDIT

Ownership Interest/Equity/Capital & Reserves

The residual amount found by deducting all of the entity’s liabilities from all of the entity’s assets

What are the main reasons for changes in equity? (4)

1. Making a profit/loss through business operations

2. Issuing new shares

3. An asset which increases/decreases in value

4. A liability which increases/decreases in value

Share capital

amount of money invested in a company by its owners in exchange for shares (partial ownership of company)

Share certificates

legal document issued by a company to a shareholder as evidence of ownership of a specific number of shares in the company - proof of ownership

Par/Nominal Value

fixed face value of a share stated in the company’s constitution. Represents minimum price at which share can initially be issued

When is par/nominal value determined?

When a company is FORMED

What is the standard journal entry for the issue of shares?

Bank DR £ price x number of shares issued

Share Capital CR £ nominal value x number issued

Share Premium CR £ Price total - Nominal total

How does an increase in share price benefit the issuing company?

1. Improved market value - company appears stronger and attracts more investors

2. easier and cheaper to raise new capital

3. increases borrowing capacity - higher share price enhances perceived company financial health and lowers perceived risk of failure, making it easier for company to secure loans and credit and negotiate better credit terms

4. Makes acquisitions cheaper and more attractive

5. Attracts and retains employees - employee shared purchase plans etc.

6. protects company from takeovers

7. improves reputation

Can a company issue shares below established nominal value?

NO that would be illegal under legal capital protection rule

What affects the price of a share?

1. Company performance - revenue growth, profit margins, earnings per share, cash flow strength, dividend payments. debt levels, return on equity

2. Future expectations - if investors expect higher profits, successes, market expansion, etc. share price goes UP

3. Economic conditions - interest rates. GDP growth, exchange rates, government policies…

4. Supply and demand - if shares are in high demand, their price rises - also relates to number of dividends

5. Global events

Dividends

Distributions of a company’s profits to its shareholders, usually paid in cash, as a return on their investment

Where do dividends appear in financial statements and what do they reduce?

Statement of changes in equity - reduce retained earnings

Where do drawings appear and what do they reduce?

Appear in statement of financial position - reduce owner’s capital

What is the journal entry for when a dividend is declared?

Retained Earnings DR

Dividends Payable CR

What is the journal entry for when a dividend is PAID?

Dividends Payable DR

Bank CR