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Accounting flashcards

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Topic 1: The fundamentals of accounting

Book-keeping compared with accounting: Book-keeping records transactions (what happened). Accounting uses those records to summarise, analyse and communicate what they mean, and to advise.
Profit (or loss) for a period: Income earned in the period minus the expenses of earning it. A negative result is a loss. It is shown in the statement of profit or loss.
Give three purposes of measuring profit: Any three: judge whether the business is succeeding; decide how much the owner can take as drawings; compare with earlier periods, plans or similar businesses; give lenders and tax authorities a recognised measure; support decisions such as pricing or expansion.
Accounting information for monitoring progress and for decision-making: Monitoring: comparing results with a past period or a target. Decision-making: choosing between options using the facts. The information supports a decision; it does not make it, and it cannot show things not measured in money.
Profit falls from $9,000 to $6,750. What is the percentage change?: Change ÷ original × 100 = 2,250 ÷ 9,000 × 100 = a fall of 25.0%. Always divide by the original figure, not the new one.
The accounting equation: Assets = Liabilities + Owner’s equity so Owner’s equity = Assets − Liabilities.
Asset, liability and owner’s equity: Asset: a resource the business owns (premises, inventory, trade receivables, bank, cash). Liability: an amount owed to outsiders (trade payables, loan, bank overdraft). Owner’s equity: the owner’s claim, assets − liabilities.
What makes owner’s equity rise, and what makes it fall?: Rises: capital introduced, profit. Falls: a loss, drawings. No other transaction changes owner’s equity.
Assets are $27,800 and owner’s equity is $18,300. Find liabilities.: Liabilities = Assets − Owner’s equity = 27,800 − 18,300 = $9,500.
A machine costing $7,400 is bought on credit. Effect on assets, liabilities and owner’s equity?: Assets up $7,400, liabilities up $7,400, owner’s equity no change.
Goods that cost $650 are sold on credit for $940. Effect on assets and owner’s equity?: Both rise by the profit: 940 − 650 = $290. Liabilities do not change.
Finding profit from the change in owner’s equity: Profit = closing equity − opening equity − capital introduced + drawings. Example: 38,650 − 31,200 − 2,500 + 7,200 = $12,150.

Topic 2: Sources and recording of data

The double entry rule: Every transaction has one debit and one credit of the same amount, in two different accounts. Each entry names the other account.
Which accounts increase on the debit side, and which on the credit side?: Debit side: assets, expenses and drawings. Credit side: liabilities, capital and income (such as sales). A decrease goes on the opposite side.
Goods are sold on credit. Which account is debited and which credited?: Debit the customer’s account (in the sales ledger). Credit Sales.
A customer returns goods. Which account is debited and which credited?: Debit Sales returns. Credit the customer’s account.
The owner takes money from the bank for personal use. Debit? Credit?: Debit Drawings. Credit Bank. Drawings are never an expense.
A non-current asset is bought on credit. Debit? Credit?: Debit the non-current asset account. Credit the supplier’s account.
Balancing an account: Total both sides; put the difference on the smaller side as Balance c/d so both totals agree; then show it below the totals on the other side as Balance b/d.
Sales ledger, purchases ledger and nominal (general) ledger: what each holds: Sales ledger: credit customers’ accounts. Purchases ledger: credit suppliers’ accounts. Nominal (general) ledger: all other accounts.
What does a credit balance on the bank account mean?: The account is overdrawn: the business owes the bank (a liability). A debit balance is cash at bank.
Invoice, credit note and debit note: Invoice: the bill for goods supplied on credit. Credit note: reduces the amount owed, for example after a return. Debit note: a request for credit, or an extra charge.
Statement of account: A periodic summary, sent by the seller, of one customer’s account. It is used to check the ledger account.
Receipt, cheque counterfoil and paying-in slip: Receipt: proof that money was handed over. Cheque counterfoil: the payer’s stub, used for cash book payments. Paying-in slip: the depositor’s record of money paid into the bank.
Trade discount compared with cash discount: Trade discount: taken off the list price on the invoice; only the net figure is recorded. Cash discount: a reward for paying early, recorded in the cash book when the money moves.
25 items at $40 less 20% trade discount, with 2.5% cash discount for prompt payment. Invoice value and cash received if paid in time?: Gross 1,000 − trade discount 200 = invoice $800 (entered in the sales journal). Cash discount 2.5% × 800 = $20, so $780 is received.
Why is a bank statement a useful source document?: It is the bank’s own record of the account. It shows items such as charges, interest and direct debits that may not yet be in the cash book.
Which book of prime entry records: credit sales, credit purchases, returns inwards, returns outwards?: Credit sales: sales journal. Credit purchases: purchases journal. Returns inwards: sales returns journal. Returns outwards: purchases returns journal.
What is recorded in the general journal?: Anything that fits no other book: non-current assets bought on credit, opening entries and the correction of errors.
The dual function of the cash book: It is both a book of prime entry and the ledger account for cash and bank, so there is no separate cash or bank account in the ledger.
Posting the sales journal: Debit each customer’s account with the invoice amount. Credit the Sales account with the total.
How are the cash book discount columns posted?: Total of discount allowed: debit Discount allowed. Total of discount received: credit Discount received.
Contra entry in the cash book: Cash paid into the bank (or drawn out of it) is entered on both sides of the cash book, in the cash and bank columns, and posted nowhere else.
Imprest system: a float of $80 and vouchers totalling $61.30. How much is restored, and what is left?: Cash left is 80 − 61.30 = $18.70. The top-up equals the amount spent, $61.30, which brings the float back to $80.

Topic 3: Verification of accounting records

Trial balance: A list of every ledger balance on a given date, in a debit column and a credit column.
Purposes of a trial balance: Tests that total debits equal total credits; signals that an error exists when the totals differ; provides the balances for the financial statements.
Name the six errors that do not affect the agreement of the trial balance: Commission, compensating, complete reversal, omission, original entry, principle (“C C C O O P”).
Error of commission compared with error of principle: Commission: right class of account, wrong account (gas debited to electricity). Principle: wrong class of account (a machine debited to repairs).
Error of original entry and complete reversal of entries: Original entry: the same wrong amount on both sides (1,860 entered as 1,680). Complete reversal: the right accounts and amount, but debit and credit swapped.
The trial balance totals disagree and debits are larger. Where does the difference go?: On the credit side of a suspense account, so the totals agree until the errors are found. (Credits larger: debit suspense.)
A balance of $250 is put in the wrong column of the trial balance. Effect on the difference?: It changes the difference between the totals by twice the balance: $500.
Method for a correcting journal: Write what was done, then what should have been done; journal the difference in each account; add a narrative.
A $650 cheque from a customer was debited to the customer and credited to bank. Correcting journal?: Complete reversal: correct with double the amount. Debit Bank $1,300, credit the customer $1,300.
A purchase of $1,860 was entered as $1,680 in both accounts. Correcting journal?: Error of original entry: journal the difference only. Debit Purchases $180, credit the supplier $180.
Which errors need a suspense account entry to correct them?: Those that made the totals disagree: one-sided entries, different amounts on each side, two entries on the same side, and addition mistakes. Suspense must clear to nil.
Which corrections change profit?: Only those that involve a revenue or expense account. Increasing revenue or reducing an expense raises profit. If both accounts are expenses, or both assets or liabilities, profit is unchanged.
A drill costing $2,450 was debited to repairs. Effect of correcting it on profit and on the statement of financial position?: Error of principle. Profit rises by $2,450 (repairs fall); non-current assets rise by $2,450, and capital rises with the profit.
Unpresented cheque and uncredited deposit: Unpresented cheque: issued and entered in the cash book, not yet paid by the bank. Uncredited deposit: paid in and entered in the cash book, not yet added by the bank.
Which items from the bank statement update the cash book, and on which side?: Credit side: bank charges, interest paid, direct debits, standing orders. Debit side: credit transfers received, interest received.
Standing order compared with direct debit: Standing order: a fixed payment your bank makes on dates you set. Direct debit: collected from your account by the other party, which sets the amount.
Starting from the updated cash book balance, what do you do with unpresented cheques and uncredited deposits?: Add unpresented cheques; deduct uncredited deposits. You should finish on the bank statement balance. (From the statement, the signs reverse.)
Updated cash book $2,500, unpresented cheques $600, uncredited deposit $350. Bank statement balance?: 2,500 + 600 − 350 = $2,750.
The bank charges your account in error. Is the cash book changed?: No. The bank is told and the error appears on the bank reconciliation statement. Only the business’s own errors and omissions are corrected in the cash book.
Effect of digital payments on bank reconciliation: Card, online and transfer payments clear quickly, so fewer timing differences; online banking allows daily checking and software can match items. Charges and direct debits still need entering, and unmatched items still need review.
Purposes of control accounts: Give total trade receivables or payables at any date; check the ledgers, as totals come from the books of prime entry; help control, as a different person can keep them; help find a missing figure.
Sales ledger control account: what goes on the debit side?: Opening debit balances, credit sales, dishonoured cheques, interest on overdue accounts, refunds paid to customers, closing credit balances c/d.
Sales ledger control account: what goes on the credit side?: Opening credit balances, receipts from customers, discount allowed, sales returns, irrecoverable debts, contra, closing debit balances c/d.
Purchases ledger control account: main entries on each side: Credit: opening credit balances, credit purchases, interest charged by suppliers, refunds received. Debit: payments to suppliers, discount received, purchases returns, contra.
A contra (set-off) between a customer who is also a supplier: entries?: Debit the purchases ledger control account; credit the sales ledger control account, with the amount set off. No cash moves.
Opening debit balances $8,200; credit sales $15,000; receipts $13,100; discount allowed $300; returns $500. Closing debit balance?: 8,200 + 15,000 − 13,100 − 300 − 500 = $9,300.
Do trade discount and cash sales appear in a control account?: No. Only credit transactions go in, and only at the net invoice value. Cash discount does appear.

Topic 4: Accounting procedures

Capital expenditure and revenue expenditure: Capital expenditure: buying or improving a non-current asset, including delivery and installation. Revenue expenditure: day-to-day running costs and upkeep, such as repairs, fuel and wages.
Capital receipts and revenue receipts: Capital receipt: not trading income, such as capital or a loan paid in, or the proceeds of selling a non-current asset. Revenue receipt: income from running the business, such as sales or rent received.
Revenue expenditure is treated as capital expenditure. Effect?: Profit is overstated and non-current assets are overstated (less any depreciation charged on the item).
Capital expenditure is treated as revenue expenditure. Effect?: Profit is understated and non-current assets are understated.
A repair of $540 was debited to buildings, depreciated at 10% on cost. Effect on profit and non-current assets?: Depreciation of $54 was charged on it, so both are overstated by 540 − 54 = $486.
Depreciation: The part of a non-current asset’s cost used up in a period through wear and tear, time or becoming out of date. No cash is paid.
Why is depreciation charged?: To match the asset’s cost against the revenue it helps to earn, so profit is not overstated, and so the asset is not shown at more than a realistic value.
Straight-line: cost $54,000, residual value $4,000, life 10 years. Annual charge?: (54,000 − 4,000) ÷ 10 = $5,000 a year, the same each year.
Cost $20,000, 30% reducing balance. Depreciation in year 3, and net book value at the end of year 3?: Y1 6,000 (NBV 14,000); Y2 4,200 (NBV 9,800); Y3 30% × 9,800 = $2,940, NBV $6,860.
Revaluation method: tools valued $1,420 at the start, $380 bought, valued $1,150 at the end. Depreciation?: 1,420 + 380 − 1,150 = $650. Suits loose tools and other small items.
Double entry for the annual depreciation charge: Debit the statement of profit or loss; credit the provision for depreciation account. The asset account stays at cost.
Entries in the disposal account: Debit: the asset’s cost (from the asset account). Credit: its accumulated depreciation (from the provision) and the proceeds (from bank). The balance is the profit or loss, transferred to the statement of profit or loss.
A press cost $22,000, accumulated depreciation $13,200, sold for $9,500. Profit or loss on disposal?: NBV = 22,000 − 13,200 = 8,800. Profit = 9,500 − 8,800 = $700. Compare proceeds with net book value, not cost.
Accrued expense: meaning, year-end entry and where it is shown: A cost used in the year but unpaid. Debit the expense, credit Other payables. A current liability.
Prepaid expense: meaning, year-end entry and where it is shown: A cost paid for a later period. Debit Other receivables, credit the expense. A current asset.
Accrued income and income received in advance: Accrued income: earned but not yet received; other receivable (current asset). Income in advance: received but not yet earned; other payable (current liability).
Telephone paid $1,090; $160 owing at the start and $210 owing at the end. Expense for the year?: 1,090 − 160 + 210 = $1,140.
Rates paid $6,300; $900 prepaid at the start and $1,050 prepaid at the end. Expense for the year?: 6,300 + 900 − 1,050 = $6,150.
An accrued expense is left out of the accounts. Effect?: Expenses too low, so profit is too high; liabilities (other payables) are too low.
Irrecoverable debt and allowance for irrecoverable debts: Irrecoverable debt: money due from a named credit customer that will never be paid. Allowance: an estimate of the part of the remaining trade receivables that will probably not be collected.
A customer owing $640 is declared bankrupt. Journal entry?: Debit Irrecoverable debts $640; credit the customer $640.
A debt written off last year is now paid. Entries?: First reinstate it: debit the customer, credit Irrecoverable debts recovered (income). Then record the money: debit Bank, credit the customer.
Trade receivables $18,500 before a $500 write-off; allowance 6%; opening allowance $900. Charge for the year and net receivables?: Allowance 6% × 18,000 = 1,080, an increase of $180 (an expense). Net trade receivables = 18,000 − 1,080 = $16,920.
The allowance falls from $1,400 to $1,150. Effect on profit?: The $250 decrease is income, so profit rises by $250. Only the change goes to the statement of profit or loss.
Which accounting concepts support keeping an allowance for irrecoverable debts?: Prudence (trade receivables are not overstated) and matching / accruals (each year bears its share of the loss).
The rule for valuing inventory: At the lower of cost and net realisable value, item by item (never comparing grand totals).
Net realisable value (NRV): Expected selling price less the costs still to be paid, such as repairs, repackaging, commission or delivery.
60 lamps cost $34 each. After a $6 repair they sell for $45, with $7 delivery. Value?: NRV = 45 − 6 − 7 = $32, lower than cost. Value 60 × 32 = $1,920 (a write-down of 60 × 2 = $120).
Item A: 30 units, cost $8, NRV $9. Item B: 20 units, cost $15, NRV $11. Inventory value?: A at cost: 240. B at NRV: 220. Total $460. (Comparing totals would wrongly give 490.)
Closing inventory is overstated. Effect this year?: Cost of sales understated; gross profit, profit for the year, equity and the inventory asset all overstated.
Closing inventory was overstated in Year 1 only. Effect in Year 2?: Year 2 opening inventory is too high, so Year 2 gross profit and profit are understated by the same amount. Equity at the end of Year 2 is correct; total profit for the two years is unchanged.
Inventory counted at cost on 4 January: $12,300. Purchases since 31 December $2,150; cost of goods sold since $3,120. Inventory at 31 December?: 12,300 − 2,150 + 3,120 = $13,270. For a count after the year end, subtract purchases and add the cost of goods sold since.

Topic 5: Preparation of financial statements

Advantages and disadvantages of being a sole trader: For: keeps all the profit; own boss; cheap and simple to start; private. Against: unlimited liability; limited funds; illness can stop trading; bears all losses and workload.
Cost of sales: Opening inventory + purchases (less returns, plus carriage inwards) − closing inventory.
Gross profit and profit for the year: Gross profit = net revenue − cost of sales. Profit for the year = gross profit + other income − expenses.
Current assets and current liabilities: Current assets: cash, or items turned into cash within a year (inventory, trade and other receivables, bank). Current liabilities: due within a year (trade and other payables, overdraft).
Closing capital of a sole trader: Opening capital + profit (+ capital introduced) − drawings. Example: 21,000 + 6,500 − 4,000 = $23,500.
The owner takes goods costing $260 for own use. Treatment?: Purchases fall by $260 and drawings rise by $260 (business entity). It is never an expense.
How do the statements of a service business differ from those of a trading business?: A service business sells time or skill, so there is no cost of sales or gross profit: fees less expenses give profit.
Order of items in a partnership appropriation account: Profit for the year, add interest on drawings, deduct interest on capital and partners’ salaries; share the balance in the profit-sharing ratio.
Interest on a partner’s loan compared with interest on capital: Loan interest is a business expense, charged before profit for the year. Interest on capital is an appropriation of profit.
Partner’s capital account compared with current account: Capital account: long-term investment, normally fixed. Current account: yearly entitlements (interest, salary, share of profit) and withdrawals (drawings, interest on drawings).
What goes on each side of a partner’s current account?: Credit: opening credit balance, interest on capital, salary, unpaid loan interest, share of profit. Debit: opening debit balance, drawings, interest on drawings, share of loss.
Profit for the year $36,000; interest on drawings $800; interest on capital $4,500; salary $6,000. Balance to share?: 36,000 + 800 − 4,500 − 6,000 = $26,300.
What might a partnership agreement contain?: Capital to be contributed, the profit-sharing ratio, interest on capital, drawings and loans, partners’ salaries and any drawings limits.
The balance of profit after appropriations is negative. What happens?: It is a loss, shared in the profit-sharing ratio and debited to the current accounts. Interest on capital and salaries are still credited.
Limited liability: A shareholder can lose no more than the amount paid, or agreed to be paid, for their shares.
Preference shares compared with ordinary shares: Preference: a fixed rate of dividend, paid before ordinary shareholders receive anything. Ordinary: the owners’ shares; the dividend varies and may be nil; usually carry a vote.
Ordinary shares compared with debentures: Shares: holders are owners; variable dividend shown in the statement of changes in equity; part of equity. Debentures: holders are lenders; fixed, compulsory interest shown as a finance cost; non-current liabilities.
90,000 ordinary shares of $0.50; $0.30 a share called; holders of 2,000 shares have not paid. Issued, called-up and paid-up capital?: Issued 90,000 × 0.50 = $45,000. Called-up 90,000 × 0.30 = $27,000. Paid-up 27,000 − (2,000 × 0.30) = $26,400.
Retained earnings $22,000 at the start; profit $15,000; $2,000 to general reserve; dividends $1,200 and $6,000. Closing retained earnings?: 22,000 + 15,000 − 2,000 − 1,200 − 6,000 = $27,800.
Effect of a transfer to the general reserve on total equity: None. It moves profit from retained earnings to the general reserve, changing the split of equity, not the total.
Profit from operations $36,400; $40,000 of 7% debentures. Profit for the year?: Debenture interest 7% × 40,000 = $2,800 (finance cost, charged whether paid or owing). Profit for the year = 36,400 − 2,800 = $33,600.
Prime cost: Direct material (cost of raw materials consumed) + direct labour (wages of production workers).
Cost of raw materials consumed: Opening raw materials + purchases + carriage inwards − returns outwards − closing raw materials.
Factory overheads: give examples: Indirect factory costs: indirect wages (supervisors, storekeepers, cleaners), factory rent, power, insurance, depreciation of factory machinery.
Factory cost of production: Prime cost + factory overheads + opening work in progress − closing work in progress.
Prime cost $35,500; factory overheads $9,800; opening WIP $1,200; closing WIP $1,700. Factory cost of production?: 35,500 + 9,800 + 1,200 − 1,700 = $44,800.
Cost of sales for a manufacturer, and the inventories in its statement of financial position: Cost of sales = opening finished goods + factory cost of production − closing finished goods. Inventories: raw materials, work in progress and finished goods, shown separately.
Receipts and payments account compared with income and expenditure account: Receipts and payments: a summary of the cash book, including capital items, with no adjustments. Income and expenditure: revenue items for the year only, adjusted for amounts owing and prepaid.
Surplus, deficit and accumulated fund: Surplus: income greater than expenditure. Deficit: the reverse. Accumulated fund: the club’s capital, total assets − total liabilities.
Subscriptions in arrears and in advance: where are they shown?: In arrears (owed by members): other receivable, a current asset. In advance (paid for a later period): other payable, a current liability.
Subscriptions received $3,240; arrears $120 opening, $180 closing; advance $60 opening, $90 closing. Subscription income?: 3,240 − 120 + 180 + 60 − 90 = $3,270.
How is a revenue-generating activity such as a refreshment kiosk shown?: Its own account works out the profit or loss (sales − cost of sales − direct expenses). Only that net result goes to the income and expenditure account.
A club buys new equipment. Is it in the income and expenditure account?: No. It is capital expenditure, shown in the statement of financial position. Only its depreciation is charged in the income and expenditure account.
Why might a sole trader keep incomplete records?: No book-keeping knowledge; the cost of a bookkeeper or software; small scale; the owner mainly wants to know the bank balance.
Disadvantages of incomplete records: No trial balance, so errors go unnoticed; theft is harder to detect; profit has to be rebuilt; poor control of receivables and payables; lenders and tax authorities may not accept the figures.
Statement of affairs: A list of assets and liabilities at a date, built from listed balances. Capital = assets − liabilities.
Closing capital $15,800; opening capital $12,300; drawings $7,200; capital introduced $2,000. Profit?: 15,800 − 12,300 + 7,200 − 2,000 = $8,700.
Receipts from credit customers $40,000; trade receivables $4,700 opening and $5,200 closing. Credit sales?: Credit sales = receipts + closing receivables + irrecoverable debts − opening receivables = 40,000 + 5,200 − 4,700 = $40,500.
Payments to suppliers $28,900; trade payables $3,100 opening and $3,600 closing. Credit purchases?: 28,900 + 3,600 − 3,100 = $29,400.
A margin of 20%: what is the mark-up? Cost of sales $24,000 with a 50% mark-up: revenue?: Mark-up = 20 ÷ 80 × 100 = 25%. Gross profit = 50% × 24,000 = 12,000, so revenue = $36,000.

Topic 6: Analysis and interpretation

Gross profit margin, mark-up and profit margin: Gross profit margin = gross profit ÷ revenue × 100. Mark-up = gross profit ÷ cost of sales × 100. Profit margin = profit for the year ÷ revenue × 100.
Return on capital employed (ROCE): Profit for the year before interest ÷ capital employed × 100. Capital employed = issued shares + reserves + non-current liabilities.
Current ratio and acid test (liquid) ratio: Current ratio = current assets : current liabilities. Acid test = (current assets − inventory) : current liabilities. Both are written as x : 1, never as a percentage.
Current assets $51,000 including inventory $21,000; current liabilities $30,000. Current ratio and acid test?: Current ratio 51,000 : 30,000 = 1.70 : 1. Acid test 30,000 : 30,000 = 1.00 : 1.
Rate of inventory turnover and inventory turnover in days: Rate = cost of sales ÷ average inventory (times). Days = average inventory ÷ cost of sales × 365. Average inventory = (opening + closing) ÷ 2.
Inventory $12,000 opening, $18,000 closing; cost of sales $90,000. Rate of inventory turnover and days?: Average inventory 15,000. 90,000 ÷ 15,000 = 6.00 times. 15,000 ÷ 90,000 × 365 = 60.83 days.
Trade receivables turnover and trade payables turnover: Trade receivables ÷ credit sales × 365 (days). Trade payables ÷ credit purchases × 365 (days).
Profit $31,500 after debenture interest of $4,500; shares $120,000, reserves $60,000, debentures $50,000. ROCE?: Capital employed 230,000. (31,500 + 4,500) ÷ 230,000 × 100 = 15.65%.
The gross profit margin falls. Possible causes?: Lower selling prices, dearer purchases, or an overvalued opening or undervalued closing inventory.
Profit margin falls while the gross profit margin is steady. Why?: Expenses or interest have risen, or other income has fallen.
Trade receivables days rise above the credit period allowed. Meaning and action?: Customers are paying later, so cash is tied up. Send statements and reminders promptly, offer cash discount for early payment, check credit before selling.
A margin falls from 40.00% to 35.00%. How should the change be described?: A fall of 5.00 percentage points (not 5.00%).
Why can a business have less cash than its profit?: Non-current assets bought, inventory or receivables increased, drawings or dividends paid, a loan repaid. Profit matches income and expenses to the year; cash records money moving.
Why can cash be higher than profit?: Depreciation uses no cash; payables increased; capital introduced or a loan received; inventory or receivables decreased.
Problems of inter-business comparison: Missing detail (credit figures, opening inventory); different accounting policies; different year ends; businesses not really alike; one unusual year; non-financial aspects left out.
A business makes mostly cash sales. Which ratio does this affect?: Trade receivables turnover: very few days. It reflects the type of business, not better credit control.
A business finances itself with debentures. Effect on ROCE compared with a rival?: Capital employed is larger (it includes non-current liabilities), so ROCE tends to be lower for the same profit before interest.
Two businesses buy and sell the same goods, but value closing inventory at $20,000 and $17,000. Effect on comparison?: The lower valuation raises cost of sales and lowers gross profit by $3,000, so the gross profit margins differ (e.g. 37.50% against 36.00% on revenue of $200,000) from policy alone.
Method for an inter-business comparison answer: Quote the ratio for each business; say which looks stronger; give a factor other than management that could explain the gap; state one problem that limits the conclusion.
What do owners and managers want from accounting statements?: Owners: is my money earning enough? (profit, ROCE). Managers: where do I act? (margins, expenses, inventory and receivables days).
What do banks and other lenders look at?: Whether the loan and interest will be repaid: current ratio, acid test, profit, existing loans and assets.
What do suppliers and customers want to know?: Suppliers: will we be paid on time? (liquidity, payables days). Customers: will the business still be trading? (profit, liquidity).
Investors compared with lenders: Investors share the risk and look for growth and dividends (profit trend, ROCE). Lenders want interest paid and the loan repaid (liquidity).
Employees, governments and club members as users: Employees: job security and pay (profit trend, liquidity). Governments: tax, grants and statistics (profit). Club members: did subscriptions cover costs? (surplus or deficit).
Historic cost as a limitation: Assets are shown at their original cost, not current value, and money from different years is not comparable. Example: land bought long ago is now worth far more than its cost.
Application of accounting policies as a limitation: Estimates and choices, such as the depreciation method, inventory valuation or the size of the allowance for irrecoverable debts, change profit and asset values.
Non-financial aspects as a limitation: Things not measured in money do not appear: workforce skill, business location, the economic climate. A business with strong statements can still fail because of them.
A $30,000 machine (no residual value): A uses straight-line over 5 years, B 30% reducing balance. First-year difference in profit?: A charges 6,000; B charges 9,000. B’s profit is $3,000 lower from the policy choice alone.

Topic 7: Accounting concepts and modern practice

Business entity: The business is treated as separate from its owner. An owner’s personal bill paid by the business is recorded as drawings.
Consistency: The same methods (for example of depreciation) are used from year to year unless there is a good reason to change.
Duality: Every transaction has two aspects, a debit and a credit of equal value. It is the basis of double entry.
Going concern: The business is expected to carry on trading, so assets are shown at cost less depreciation, spread over their useful lives.
Historic cost: Assets are recorded at the price actually paid. A rise in market or replacement value is not recorded.
Matching / accruals: Costs and revenues are assigned to the period they belong to, not the period in which cash moves. The basis of accruals, prepayments and depreciation.
Materiality: Small items with little effect on decisions can be treated simply, for example a low-cost item written off as an expense.
Money measurement: Only items that can be measured in money are recorded. Staff skill or reputation is not.
Prudence: Expected losses are recognised now; gains only when earned. Profit and assets are not overstated. The basis of the allowance for irrecoverable debts and of the inventory rule.
Realisation: Revenue is recognised when it is earned: when the goods or services pass to the customer, even if payment comes later.
Why is ethical behaviour needed in accounting?: Others rely on figures they cannot check; there may be pressure to change profit; accountants see private information; a standard set in advance guides behaviour.
Integrity and objectivity: Integrity: being honest, giving no misleading figures. Objectivity: freedom from bias, conflicts of interest and pressure.
Professional competence and due care, confidentiality and professional behaviour: Competence and due care: keeping skills current and working carefully. Confidentiality: not disclosing or misusing information. Professional behaviour: following laws and protecting the profession’s reputation.
Draft profit $18,400 after a $640 personal holiday was charged to travel expenses. Correct treatment?: Business entity: it is drawings. Profit = 18,400 + 640 = $19,040 and drawings rise by $640. Leaving it as an expense to cut tax would breach integrity.
An accountant uses a client’s supplier prices to negotiate a deal for herself. Which principle is breached?: Confidentiality: information gained at work was misused for personal advantage.
Benefits and limitations of using digital applications for accounting records: Benefits: faster posting and totals, fewer arithmetic slips, easy searching, backup and reports. Limitations: cost, staff training, system failure, and one wrong input is carried through everywhere.
Name the four types of storage system for accounting records: Manual; data storage devices; cloud services; other digital services.
Cloud services for storing records: one advantage and one disadvantage: Advantage: remote access, and the provider keeps the equipment. Disadvantage: needs internet access, has a continuing cost and relies on a third party.
What does storing records safely mean?: Keeping them complete, accurate and available, and protected from loss and unauthorised access.
How can records be stored sustainably?: Print less, avoid duplicate copies, keep formats readable, and dispose of old devices responsibly once data is removed.
Risks of poor storage of accounting records: Data loss, hacking or fraud, exposure of confidential information, penalties, the cost of rebuilding records, loss of trust and waste.

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Written for Cambridge O Level Accounting (7707), syllabus 7707 (2027-2029).

Cards by Marlbridge Academic Team. This deck was reviewed by Javaid Iqbal Sabri on 2026-11-05. Report an error.

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