ATD Level I

Introduction to Financial Accounting flashcards

Read the question, say the answer to yourself, then turn the card to check. The first 10 of 48 cards are free; the rest come with the subject.

Card 1 of 48

Jump to a card

Complete Flashcard Reference

Review every card in this deck. Open any card to reveal its answer. The first 10 are free; the other 38 come with the subject.

What is the accounting equation, and how does double entry relate to it?

Assets = Liabilities + Equity. It holds after every transaction, however large the entity. Double entry is that equation enforced one transaction at a time: any change to one part must be matched by an equal change elsewhere, and debit and credit are the names of the two directions.

Which types of account increase with a debit, and which increase with a credit?

Debit increases: assets and expenses. Credit increases: liabilities, equity (capital) and income. The opposite entry decreases each. A credit is a direction, not a decrease and not money coming in.

What is the difference between capital expenditure and revenue expenditure?

Capital expenditure acquires or improves a non current asset and is added to its cost, such as fitting a canopy that lets a pickup do something new. Revenue expenditure maintains the asset in its existing condition and is charged to profit or loss as incurred, such as servicing, repainting or insurance.

At what amount is inventory measured under IAS 2, and how is the comparison made?

At the lower of cost and net realisable value. Net realisable value = estimated selling price - estimated costs of completion and of sale. The comparison is made line by line, never on the total, or one line's surplus would mask another's loss and overstate inventory.

What are the two stages of a bank reconciliation, and which balance goes into the accounts?

Stage 1: correct the cash book for items the bank knew about and the business did not (bank charges, interest, direct credits, standing orders, direct debits, dishonoured cheques, the business's own errors). Stage 2: reconcile that corrected balance to the bank statement (unpresented cheques, uncredited lodgements, bank errors). The accounts carry the adjusted cash book balance, never the bank statement balance.

Which errors leave the trial balance in agreement?

Complete omission, original entry (including a transposition in the book of prime entry), compensating errors, errors of principle and errors of commission. In each, equal debits and credits were posted, so the arithmetic check cannot see them.

How is each of an accrued expense, a prepaid expense, accrued income and prepaid income shown in the statement of financial position?

Accrued expense (incurred, not paid): current liability. Prepaid expense (paid, not incurred): current asset. Accrued income (earned, not received): current asset. Prepaid income (received, not earned): current liability, because the business owes a service.

Where the deed is silent, what does the Partnerships Act 2012 provide on profit sharing, salaries, interest on capital and interest on an advance?

Profits and losses are shared equally, whatever the capitals (s.12(1)). No salary for working in the firm (s.13(1)). No interest on capital (s.14(2)). Interest at three percent per annum on an advance beyond agreed capital, where prevailing economic circumstances permit (s.14(3)). Five percent is the English 1890 Act, not Kenyan law.

What follows from a company being a separate legal person?

It owns its own assets and owes its own debts. It is taxed in its own name, so tax appears in its statement of profit or loss. It sues and is sued in its own name. It has perpetual succession as members come and go. Its members are liable only for any amount unpaid on their shares.

Where do a sole trader's drawings belong in the financial statements?

Only in the equity section of the statement of financial position, deducted from capital plus profit. Drawings are a distribution to the owner, not an expense. Deducting them in the statement of profit or loss understates profit, and deducting them again in equity throws the position statement out by twice the drawings.

What are the three branches of accounting, and who is each for?