Accounts PP mistakes

Why might a manufacturer buy finished goods instead of producing them?

May have been unable to produce enough goods to meet demand, which could have been due to production costs

Why might a partner choose to give a loan to the partnership instead of investing more capital?

Loan is repayable and will provide a guaranteed annual income

State the prudence concept.

Profits and assets should not be overstated and losses and liabilities should not be understated

Why does maintaining a provision for irrecoverable debts follow the prudence concept?

Ensures profit is not overstated and trade receivables are not overstated

State the accruals concept.

Revenue of the accounting period should be matched against the costs of the same period whether paid or not

Why does a provision for irrecoverable debts follow the accruals concept?

Amount of sales unlikely to be paid is regarded as an expense in the year of sale

What does a credit balance on a partner’s account represent?

Amount owed by the partnership to the partner

What does a debit balance on a partner’s account represent?

Partner may have taken more money than allowed

What does it mean if the current ratio falls but the business can still pay its liabilities?

Business can still pay current liabilities

What does a liquid ratio above 1:1 indicate?

Can meet short-term debts without selling inventory

What does a fall in the current ratio suggest?

May find it difficult to meet short term debts

What does a current ratio of 1.2 (down from 2.8) indicate?

Just able to cover short term debts

What does a quick ratio of 0.8 indicate?

Below ideal → liquidity problem

How might poor liquidity affect the businesses relationship with the suppliers?

May stop supplying goods until debts are paid

How can a business improve its working capital position?

Invest additional capital which will result in current assets increasing with no effect on current liabilities

Why must prepaid expenses be adjusted at year end?

Accruals concept as only expense during the year should be matched with the income for that year

Why is depreciation charged on non-current assets?

Estimate of the loss in value of a NCA should be matched against the revenue generated

How do you correct a cheque on general expenses for 65 entered as 56?

Bank credit 9 and general expenses debit 9

you should not write what when correcting errors in journal? book? cash? account? ledger?

Do not write book, write account like cash

If purchase of stationery is recorded incorrectly, which accounts are used?

Purchases account and stationery account not petty cash account

Why is a motor vehicle treated as capital expenditure?

Because it lasts longer than a year

What happens if capital expenditure is treated as revenue expenditure?

Non current assets understated and profit for the year understated

What is a key feature of capital expenditure?

Improves non current assets

What is the definition of revenue expenditure?

Benefits in short term

Why is it important to distinguish between capital and revenue expenditure?

To present a true and fair view of the business

Why are control accounts prepared?

Helps identify errors

What does the balance on the trade payables control account show?

Total amount of money owed by the business to suppliers

Why are control accounts not prepared using ledger totals?

Errors will not be revealed

Why are control accounts and ledgers maintained by different staff?

To prevent fraud

What are the purposes of preparing a bank reconciliation statement?

Identify errors, ensure cash book is up to date, prevent fraud

Who initiates a standing order and a direct debit?

Standing order is initiated by the payer and direct debit by the payee

What are outstanding lodgements?

Cash takings banked but not yet appearing in bank statement

What should be written at the end of a bank reconciliation statement?

Balance as per bank statement

What happens if cash drawings are not recorded?

Owners equity will be overstated

What happens if wages are understated?

Expenses understated so profit overstated so equity overstated

How are goods taken for personal use recorded?

Drawings debit and purchases credit

Where is a credit note received recorded?

Purchase returns day book

Why might a trade payables account have a debit balance?

Due to prepayment to the supplier

What is meant by set off in accounting?

Supplier is also a customer and balances are offset

Where is total discount received recorded?

Credit side of discount received account

Why do businesses offer cash discounts?

To encourage prompt payment and improve cash flow

What is the source document for purchasing a non-current asset on credit?

Purchase invoice

What document is used when a cheque is issued for personal use?

Cheque counterfoil

What is one benefit of a trial balance?

Gives a summary of account balances which can be used to prepare financial statements

What is one limitation of a trial balance?

Some errors do not affect the trial balance

Why do businesses maintain full accounting records?

To identify profits and prepare documents

What is an advantage of a computerised accounting system?

Creates a professional image to customers

How can irrecoverable debts be reduced?

Give only cash sales and have strict credit control

What is the double entry for provision for irrecoverable debts?

Debit income statement and credit provision

Purchases affect which account?

Trade payables

Drawings affect which account?

Purchases account not asset account

Why are trade receivables not overstated when a provision is created?

Because of the prudence concept

Where is purchase of a non-current asset by cheque recorded?

Cash book

How is interest charged recorded?

Credit