Classification of Accounts
These five account classifications are represented in the acronym REALOE
This basic principle ensures that transactions are split into two different natures. These natures must also always have equal total values.
Double Entry Principle (Or double entry accounting)
These four accounts/expenses make up the ITDA of EBITDA in the EBIDTA Margin Ratio.
Interest, Tax, Depreciation and Amortisation
What does it mean to create an extract of a report or ledger?
That some accounts are missing and only crucial information in a small area is present.
Lashan has some urgent questions about accounting and he needs help. List 3 people he could talk to.
Ms Tyler or Mr Mihos (His Teacher)
His tutor or his parents
Vraj or Matthew (Classmate)
Classify the following five accounts:
1. Bank Overdraft
2. Prepaid Expenses
3. Interest on Overdraft
4. Dividends on Shares in XYZ Co
5. Depreciation on Cash Registers
1. Current liability
2. Current Asset
3. Finance Expense
4. Other Revenue
5. Selling Expense
The Accounting Entity Concept
These two classifications split the ratios into two areas. One about revenue the other about assets
Profitabilty and Liquidity
Provision for bad and doubtful debts appears in the statement of financial position where it is directly linked with what account
Accounts Receivable
In order to protect yourself from QCAAs markers, where should you source your account names from?
The provided General Ledger
or
The provided Chart of accounts
or
Any other report or stimulus with account names in them (Just make sure they link to the question you are answering)
These four accounts are classified as Balance Day Adjustments.
Accrued Revenues
Accrued Expenses
Prepaid Expenses
Unearned Revenues
This concept splits a businesses lifespan into equal time slots called _____. It allows reports to be made with complete and accurate data.
The Accounting Period Concept
This ratio helps determine if the business is making full use of its assets. (It helps check If the business should sell its assets)
Rate of return on Total Assets
A business forgets to report its depreciation but still updates the accumulated depreciation account. Will this have any effect on the Statement of profit or loss and the statement of financial position. If so what?
The profit figure in the statement of profit or loss will be higher than the actual accurate value. This will also cause the Net assets and the net owner's equity to not equal in the Statement of financial position.
Ollie knew he would ace this exam and didn't study at all. After opening the paper Ollie begins to panic as he doesn't understand the source documents provided.
List the 3 important things Ollie must decipher from these source documents to accurately create a General Journal
Date of transaction,
Accounts Affected,
Magnitude/Value of the accounts that were affected.What does the account Goodwill represent, how is it classified?
Goodwill represents the value of the businesses name.
Classified as a non-current intangible asset
This Principle increases the reliability of reporting by ensuring capital expenditure is linked with the assets it was paid for.
It is also the cause for depreciation having its own account.
The Historical Cost Principle
This Ratio helps determine a companies ability to pay its short-term debts without having to sell assets prematurely.
Quick Ratio
only give +200 for current ratio as its not the best answer
Balance the following Ledger account
Debit total balance = 2000
Credit total balance = 1500
Balance C/d 500 on the credit side the last day of month
Balance B/d 500 on the debit side the next month
What distinctive part of the balance day adjustment accounts help distinct them from regular revenue and expense accounts. (Focus on their names)
The s at the end of them
Prepaid Expenses, Unearned Revenues, Accrued Expenses, Accrued Revenues
What are the ways of classifying Assets in the Statement of Financial Position. Give an example of each.
Current Assets -> Cash at Bank
Non-Current Assets
Property, Plant and Equipment -> Motor Vehicle
Investments -> Shares in XYZ Co
Intangibles -> Patents
This Principle assumes that the decisions a company makes to run the business rather than liquidating it
Going Concern Principle
This ratio helps determine the proportion of funding that is received from external sources when compared to the owners investment
Gearing Ratio
You've performed a horizontal analysis of a business's trial balance over 2 years and found the following major changes. Which is the biggest red flag, justify your answer.
1. Bank overdraft (+5%)
2. Accounts Receivable (-50%)
3. Sales returns and Allowances (+10%)
4. Bad and Doubtful Debts (+20%)
Bank overdraft is the correct answer. This is due to it showing that over 2 years the business has not only failed to pay its debts but instead is increasing them. (The most negative)
Accounts receivable decreasing may be due to a shift to a cash based sales system (Not negative).
Sales returns and allowances increasing is normal as the account will fluctuate a lot. While it is negative it is not the worst. (Negative but not the worst)
Bad and Doubtful Debts is a fluctuating account and will often increase when a large number of credit sales occurs. (Can be negative)
After competing a Statement of Financial Position using a trial balance Mark realises his Net assets does not equal his total Owner's Equity. What is the first thing he should do, justify your answer.
Correct Answers: Check calculations, Check for missed accounts, Check for wrong classifications.
Wrong Answers: Give up, Start again, Scream, Check the trial balance for errors.