W1- Trial Balances & Double entry system

What does prudence mean?

being cautious when making a judgement

What is meant by the accruals concept?

fundamental principle of accounting- matching income to expenses

What is meant by dual aspect

refers for the double entry of accounting where total debits = total credits

What is the difference between a sole trader and a company?

• sole trade- single owner responsible for all liabilities & includes all personal assets

• Companies- single/multiple owners (PLC and LTD) and shareholders’ liability limited by the amount paid for shares, they are a separate legal entity

What are the 4 types of financial statements/accounts?

• SOFP/ balance sheet- statement of financial position

• SOCI / income statement- statement of comprehensive income

• CFS- statement of cash flowers

• SOCE- only for Limited Companies or PLCs

What does a SOFP/balance sheet show?

• a company’s financial position at a point in time (net assets)

• SOFP as at [date]

• shows what business owns minus what they owe

What does income statement show?

• a company’s financial performance (change in profit)

• '“income statement for the period ended [date]”

• shows all income minus all expenses over period of time

What does CFC show?

• change in cash

• “CFC for the period ended [date]”

What is the SOCE and what is it only used for?

• statement of changes in equity

• only for Limited companies or PLCs

• it links SOCI to SOFP by showing changes in profits, reserves and equity over a period of time

What elements make up the SOFP?

assets, liabilities, equity (at a point in time)

What elements make up the income statement?

income and expenses (for the accounting year to same point in time as SOFP)

What is meant by the term assets?

owned & used to generate future economic benefits

What are non-current assets? Give examples

• includes tangible and intangible assets used/held for a long period of time

• eg. property, plant & equipment

What are current assets? Give examples

• assets that are held for a short period of time

• eg. inventories, trade receivables, bank (positive balance) & cash (petty cash)

What is meant by inventories?

goods & materials used for resale & production eg. raw materials and finished goods

What is meant by trade receivables?

amounts owed by customers to the business on credit

What is meant by bank balance? What happens if it is a positive or negative balance

• positive bank balance = asset

• negative bank balance = liability (overdraft)

What is meant by liabilities?

this is what the business owed

What are non-current liabilities? Give examples

• include long term loans and borrowings which are due > 1 year

• eg. long term bank loans or mortgage accounts

What are current liabilities? Give examples

• include short term loans and borrowings which are due to be repaid < 1 year

• eg. Trade payables, bank overdraft account

What is meant by trade payables?

amounts owed by the business to trade suppliers (credit purchases)- they have to pay them back quickly otherwise they might not supply to firm anymore

What is meant by income? Give examples

• increase in economic benefits during accounting period in form of inflows/ enhancements of assets/ decreases of liabilities

• eg. income raised from trading activities of the business, including all sales (cash & credit)

What is meant by expenses? Give examples

• decreases in economic benefits during accounting period in form of outflows/ depletion of assets/ increase of liabiities

• all costs from accounting year regardless of cash was paid for it or still owed

• eg. expenses from manufacturing, administration, sales, tax

What is meant by equity? Give examples

• what the business owes the owner (capital & profits)

• residual interest in assets after deducting liabilities

• eg. capital and all profits (retained earnings & reserves) built up over time

What is a trial balance?

• a list of accounts at the year-end (these accounts are then reflected in the SOFP and I/S)

• each account has a debit or credit balance

• debit = credit

What is the opening/ brought forward figure?

it is taken from the closing/carried forward figure from previous accounting year

Are there opening or closing figures for the income statement?

no balances are brought forward as they’re closed off at the end of accounting period

Sort assets, provisions against assets, liabilities, equity, income & expenses into debit and credit (explain what this means)

• debit- if the business owns something

• credit- if the business owes something

  • LHS - assets & expenses

What does it mean to credit or debit something in the SOFP and I/S?

SOFP- debit ↑ credit ↓

SOCI- debit ↓ credit ↑

What do u need to add to the end of a trial balance to make the trial balance balance?

owner’s equity/investment

What is the double entry system?

there are 2 sides to every transaction a debit and a credit

If an account has a debit or credit balance what happens when u debit or credit it?

• If account has debit balance eg. asset, expense

  • debiting = increasing

  • crediting = decreasing

• If account has credit balance eg. liability, income, equity

  • debiting = decreasing

  • crediting = increasing

What happens if an asset is bought on cash? What is the double entry?

• debiting the asset’s account

• crediting the bank account (money leaves bank account)

What happens if an asset is bought on credit? What is the double entry?

• debiting the asset’s account

• crediting the liability

What is the double entry if cash is received from a sale?

• debit the bank account

• credit the sales account (income generated is always credited)

What is the double entry if the sale was made on a credit?

• debit trade receivables account (more owed to business)

• credit sales account (income increases)