Accounts O level notes

Profitability ratios

measure the company's ability to generate profit from its operations

Liquidity ratios

measure a firm's ability to turn assets into cash to pay its short-term debts

bank loan

A fixed amount borrowed by the business with a set repayment schedule and interest rate

Bank overdraft

A flexible form of borrowing that allows a business to withdraw more money than it has in its account

direct debit

an agreement to allow a bank to withdraw varying amounts of money from an account

standing order

an agreement to allow a bank to make fixed payments at fixed intervals

credit transfer

an electronic payment made directly from one bank account to another

Purpose of Bank Reconciliation Statement

to identify and explain any differences between a company's bank balance and its accounting records

bank statement

A report/record of all transactions processed by the bank

Bank Reconciliation Statement

A statement that accounts for all differences between the balance on the bank statement and the balance of the cash book

journal

a book of original entry where transactions are recorded in chronological order in lists

Ledger

a book that summarizes & categorizes transactions from the journal into specific accounts

Manufacturing account

shows the cost of goods produced by a company over a period of time.

Direct Costs

costs that can be easily traced to the product produced

non-for-profit organization

an organization whose primary objective is not to make a profit

accumulated fund

the surplus amount of money generated from revenue and donations

receipts and payments account

a summary of the cash book for the financial year

Income and expenditure account

a financial statement that shows the income earned and expenses incurred by the organization for the financial year

Cost Concept

amounts are initially recorded in the accounting records at their original cost or purchase price (& subsequently

Accrual Concept

A business should account for all expenses incurred and revenue earned during the financial year irrespective of when payment is paid/received

Prudence concept

A business should account for all possible expenses

Business Entity Concept

A business is considered to be a separate entity from its owners (financial information is recorded and reported separately from the owner's personal financial information)

Consistency Concept

A business may decide to choose whichever method of depreciation it deems fit for its business for each category of NCAs. However

Going Concern Concept

financial statements are prepared with the expectation that a business will remain in operation for the foreseeable future

Money Measurement Concept

Only transactions that can be measured in monetary terms are recorded in the accounting records of a business

Accounting Concepts

the principles of how to record & interpret accounting information

Cost Concept (Inventory)

Inventory should be valued at lower of cost (its cost or its NRV

Accrual Concept (Allowance for TR)

The allowance for TR is recorded as an expense in the same financial year as when the money should have been received

Accrual Concept (Depreciation)

The depreciation expense is recognized as an expense in the same financial year in which the asset is being used to generate revenue

Prudence concept (Inventory)

Inventory should be valued at the lower of cost or net realizable value (to ensure that the financial statements do not overstate the company's assets or profits)

Going Concern Concept (NCAs)

Since the company will continue to use these assets in its operations for the foreseeable future

Books of Original Entry

These are where transactions are originally recorded

Capital Employed

the total amount of money invested in a business

Return on Capital Employed

measures how well the business operating profit from the amount of capital employed

An increase in profitability ratios

mean that a business is becoming more efficient at converting its operations into profits

An decrease in profitability ratios

mean that a business is becoming less efficient at converting its operations into profits

An increase in liquidity ratios

mean that the company is more able to convert its assets into cash to pay off its short term obligations

A decrease in liquidity ratios

mean that the company is less able to convert its assets into cash to pay off its short term obligations

Sales day book prepared from

sales invoice issued to customer

Purchases day book prepared from

purchases invoice received from supplier

Sales returns day book prepared from

credit note issued to customer

Purchases returns day book prepared from

credit note received from suppliers

A business owner would calculate working capital to

see the liquidity of the business

A business owner would calculate capital employed to

see the long term investments & liabilities of the business