Double entry book

Question 1

When are financial statements prepared are what is prepared?

Answer 1

Each accounting period of a business and is usually a full year
* every business is free to choose its own accounting period but common to match the calender year or tax year

The financial statements prepared are:
- a profit and loss account
- a balance sheet

Question 2

What are things to note about book-keeping ledgers?

Answer 2

• Transactions of similar types (e.g., payment of rent and electricial bill) are goruped together and recorded in a single place = nominal ledger
• collective name for all different ledgers used by business is books

Question 3

What is a trial balance?

Answer 3

A list of all balances on all of a business’ accounts as at the end of accounting period - showing debit balances and credit balances, total of each balances should be the same
* forms the basis of which financial statements (profit and loss account and balance sheet) are then complied.

Question 4

What are the different classifications of ledgers/accounts?

Answer 4

Asset: something business owns - business will have a separate account for each category of asset (e.g., motor vehicles, cash in bank)
Liability: something business owes - business will have an account for each different type of liability (e.g., loans or trade debts)
Capital: injection of value from an owner or investor rather than money generated by business
Income: monery earned by business from a regular source - separate business account
Expense: money spent by business - different types of expenses are recorded in separate account (e.g., heating and lighting)

need to identify these different types of account by looking at financial statement of business

Question 5

What are the different types of assets?

Answer 5

1. Fixed Assets: any asset, tangible or intangible (e.g., trade mark or patent) owned by a business that will enable it to make profit
   
   • must be held by company for over a year and provide some long-lasting benefit to company
   • can be called ‘non-current assets’
2. Current Assets: include cash and items owned by business (or owed to) which can quickly turn into cash within one year
   
   • assets are continually flowing through business and have a shorter-term nature
   • e.g., stock, debtors (owe money to business) and cash business has in its account and cash in hand/petty cash

Question 6

How are liabilities categorised?

Answer 6

• Current liabilities:
  
  • those due to be paid within a year
  • e.g., bank overdraft and trade creditors
• Long-term liabilities:
  
  • falling due after more than one year (e.g., term loan)

Question 7

How does Capital work in respect to sole traders?

Answer 7

Business owned by sole trader does not have separate legal personality but for accounting purposes, they do and are treated as separate entities.
* sole trader may invest lump sum of own money into business when setting it up
* capital account will include profits business has retained over the years
* sole trader earns from profits of their business - they pay themselves by drawing out profits of business so account is labelled drawings in trial balance which is a capital account as it’s a transaction business business and owner.

Question 8

Income and expense accounts?

Answer 8

• Income accounts record sums received by business (e.g., payments form customer in relation of sales of goods or services)
• Expense accounts record day-to-day spending (e.g., income expenditure)
  
  • DOES NOT include long-term assets (e.g., car or building) which are capital expenditure
  • needs to be items in which business will not hold for a long time before it uses them up

Question 9

What is a year-end adjustments?

Answer 9

Before trial balance can be used to prepare financial statements, year-end adjustments are used to ensure all income and expenditure shown on financial statement relates only to relevant accounting period

Question 10

How does the process of producing the financial statement go?

Answer 10

1. Bookkeeping ledgers
2. Trial balance
3. ALCIE classification & year-end adjustments
4. Profit and loss accounts & Balance sheet