Final Accounts Preparation Flashcards

In the accounts of a sole trader, drawings are:

Answer: A deduction from capital in the balance sheet

Drawings are amounts taken out of the business by the owner for personal use; they reduce the owner's capital in the balance sheet and are not business expenses.

Goodwill in a partnership arises when:

Answer: A partner joins or leaves and the partnership's value exceeds its net assets

Goodwill in a partnership context typically needs to be valued when a partner joins or leaves, as the new arrangement should reflect the true value of the business including its reputation, customer base, and earning capacity.

The notes to the accounts form part of the financial statements and provide:

Answer: Additional detail and disclosures required by law and accounting standards

Notes to the accounts are a mandatory component of the financial statements; they expand on figures in the primary statements, describe accounting policies, and provide disclosures required by company law and accounting standards.

When a partner retires and their capital account has a credit balance, the business usually:

Answer: Converts it into a loan from the retiring partner by agreement

Commonly, when a partner retires, the amount owed is agreed and may be left as a loan account bearing interest if not immediately settled, allowing the business to continue without requiring an immediate cash outflow.

In calculating cost of sales, which of the following is added to purchases?

Answer: Opening inventory

Cost of Sales = Opening Inventory + Purchases + Carriage Inwards − Purchase Returns − Closing Inventory. Opening inventory is added because it was available for sale during the period.

A company issues shares at a price above their nominal value. The excess is recorded as:

Answer: Share premium account

When shares are issued at a price above their nominal (par) value, the nominal value goes to share capital and the excess is credited to the share premium account, both within equity.