Flashcards · YAC11 · AS Topic 1.1

Principles of accounting and double entry bookkeeping (AS Level) flashcards

42 cards on AS Topic 1.1, subtopics 1.1.1-1.1.2 to 1.1.13-1.1.20. Pick a subtopic or study them all.

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1.1.1-1.1.2 Role and purpose of accounting

The three parts of the role of accounting: Record transactions in money terms, analyse them (totals, comparisons, percentages) and communicate the results to users.
Five ways accounting is an aid to management: Planning, controlling, decision making, assessing performance and safeguarding assets.
What do a lender, a supplier and the tax authority each want to know from the accounts?: Lender: ability to repay the loan and interest. Supplier: likelihood of being paid on time. Tax authority: taxable profit.
Revenue 90,000, cost of sales 54,000. Gross profit as a percentage of revenue?: Gross profit 36,000. 36,000 ÷ 90,000 × 100 = 40.0%. If last year was 44%, the manager asks why the margin fell.

1.1.3-1.1.7 Double entry system

Debit and credit rules for assets, expenses, liabilities, capital and income: Assets, expenses and drawings: debit to increase, credit to decrease. Liabilities, capital, revenue and other income: credit to increase, debit to decrease.
Double entry: owner takes goods for own use: Debit Drawings, credit Purchases.
Double entry: discount allowed to a customer, and discount received from a supplier: Discount allowed: debit Discount allowed, credit the customer. Discount received: debit the supplier, credit Discount received.
Electricity paid 1,380; 210 owing at the start and 340 owing at the end. Charge for the year?: Paid + closing accrual − opening accrual. 1,380 + 340 − 210 = 1,510.
Insurance paid 960; 120 prepaid at the start and 270 prepaid at the end. Charge for the year?: Paid + opening prepayment − closing prepayment. 960 + 120 − 270 = 810.
Opening inventory 3,800, purchases 27,600, purchases returns 900, closing inventory 4,300. Cost of sales?: 3,800 + 27,600 − 900 − 4,300 = 26,200.
Receivables after write-offs 36,000; allowance 4%; existing allowance 1,260. What goes through profit or loss?: New allowance 1,440. Increase 1,440 − 1,260 = 180, an expense: debit statement of profit or loss, credit allowance.
The allowance for irrecoverable debts falls from 1,440 to 1,210. Entry?: Debit Allowance for irrecoverable debts 230; credit the statement of profit or loss 230, which increases profit.
Imprest petty cash: float 120, payments of 86. Reimbursement and the credit entry?: Reimburse 86, credited to Bank, restoring the float to 120. The analysis totals are debited to the expense accounts.
In which book of prime entry is a credit note received from a supplier first recorded?: The purchases returns day book. It is posted as debit the supplier, credit Purchases returns.
A figure of 1,650 is keyed as 1,560 in accounting software. Why does the trial balance still agree?: The software posts the wrong amount to both sides equally. The error is 90, divisible by 9, a typical sign of transposed digits.

1.1.8-1.1.10 Accounting concepts and conventions

30 units cost 8 each; selling price 12 with selling costs of 5 each. Inventory value and concept?: NRV = 12 − 5 = 7. Value at the lower of cost and NRV: 30 × 7 = 210 (cost 240). Profit falls by 30. Prudence.
A deposit of 500 is received for goods to be delivered next month. Year-end treatment and concept?: A liability until delivery; it is not yet revenue. Realisation: revenue is recognised when the goods or services are supplied.
Rent of 6,000 for 12 months is paid on 1 October. Year end 31 December. Expense and prepayment?: Expense 3 × 500 = 1,500. Prepayment 4,500 (other receivables). Accruals concept.
Land cost 90,000 and is now worth 140,000. Which concept keeps it at 90,000?: Historic cost: assets are recorded at the price paid.
Materiality: An item matters only if it could change a user's decision. Immaterial items (a cheap stapler) can be expensed rather than treated strictly.
Money measurement: Only items that can be measured reliably in money are recorded, so staff skills and reputation are left out of the accounts.
Going concern: The business will continue for the foreseeable future, so assets are kept at carrying value and costs spread over asset lives.
Accruals vs realisation: Accruals matches income and expenses to the period they are earned or incurred. Realisation fixes the point at which revenue is earned.
Business entity: the owner pays a personal holiday from the business bank account: Owner and business are separate, so it is drawings, not a business expense. Drawings reduce capital.
Give the IAS terms for debtors, creditors, stock and net book value: Trade receivables, trade payables, inventory and carrying value.
Two benefits of International Accounting Standards: Comparability between businesses, trust in the statements, and less room to flatter the figures.

1.1.11-1.1.12 Capital expenditure and revenue expenditure

Capital vs revenue expenditure, with examples: Capital: acquiring or improving a non-current asset (price, delivery, installation, an upgrade adding capacity); goes to the SOFP then is depreciated. Revenue: running costs or maintenance (repairs, servicing, fuel); charged in full to profit or loss.
Effect of treating capital expenditure as revenue expenditure, and the reverse: Capital as revenue: profit understated and non-current assets understated. Revenue as capital: profit overstated and non-current assets overstated.
Is the cost of installing a new machine capital or revenue expenditure?: Capital: it is a cost of getting the asset ready for use.
An upgrade that adds capacity vs a repair that restores original condition: The upgrade is capital expenditure; the repair is revenue expenditure.
A capital item of 5,000 is charged as an expense in error. Effect on profit, ignoring depreciation?: Profit is understated by 5,000, and non-current assets are understated by 5,000.
Four concepts used to justify capital and revenue decisions: Accruals (spread a multi-year benefit), prudence (do not overstate profit or assets), materiality (trivial items expensed), consistency (same policy each year).

1.1.13-1.1.20 Non-current asset depreciation

Five causes of depreciation: Wear and tear, obsolescence, passage of time (leases, patents), depletion and inadequacy.
Three things depreciation is not: It is not a cash outflow, not a fund set aside for replacement, and carrying value is not market value.
Straight line: cost 36,000, residual value 3,000, life 6 years. Annual charge?: (36,000 − 3,000) ÷ 6 = 5,500 a year.
Reducing balance at 20% on cost 36,000: charges for years 1 to 3: Year 1: 7,200 (carrying value 28,800). Year 2: 5,760 (23,040). Year 3: 4,608 (18,432). Residual value is ignored in the calculation.
A van costing 18,000 is bought on 1 October; 15% a year on cost; year end 31 December. Charge for the year?: 18,000 × 15% × 3/12 = 675.
Revaluation method: fixtures valued 8,500 at the start, 900 bought, valued 7,300 at the end. Depreciation?: Opening valuation + additions − closing valuation = 8,500 + 900 − 7,300 = 2,100.
A van (cost 16,000, accumulated depreciation 9,600) is part-exchanged for an allowance of 5,000. Result?: Carrying value 6,400. Loss on disposal 6,400 − 5,000 = 1,400. The new van is recorded at its full price.
After two years of straight line at 5,500 a year on cost 36,000, the business switches to 20% reducing balance. New charge and effect?: Carrying value 36,000 − 11,000 = 25,000. Charge 20% × 25,000 = 5,000: 500 less than 5,500, so profit is 500 higher that year. Earlier years are not restated.
Disposals account: the four steps: Debit with the asset at cost. Credit with depreciation to the date of disposal. Credit with the proceeds or part-exchange allowance. The balance is a profit (credit side) or loss (debit side), transferred to profit or loss.
Schedule of non-current assets: what must agree with the statement of financial position?: Closing carrying value = closing cost − closing accumulated depreciation, for each class and in total.