chapter 7 – business accounting syllabus unit – business finance and accounting
TRANSCRIPT
Chapter 7 – Business Accounting
Syllabus Unit – Business Finance and Accounting
You will learn …………….
• What is meant by “accounts”• Why businesses need to keep accounting
records and use financial documents • Who uses these accounting records• What final accounts of a company contain
– Profit and Loss Account– Balance Sheet
• How the published accounts can be used to analyse the performance of a business
Introduction
• Accounts– The financial records kept by a
business
• Accountants– Professionally qualified people
who have the responsibility for keeping accurate accounts and for producing the final accounts
Why are accounts necessary?
• Collection of money from customers
• Ordering stock within limits
• Cash flow
• Profit/Loss
• Tax
Financial Documents involved in Buying & Selling
• Purchase Order• Delivery Notes• Invoices• Credit Notes• Statement of Accounts• Remittance Advice Slips• Receipts
Purchase Order
Purchase Order
To:Sweet Wholesalers LtdManor RoadNewtown
Abdul Sweets Ltd15 Old RoadNewtownTel: 0381 865 4121Fax: 0381 865 4022Date: 18/4/10Order No: 02/136
QUANTITY DESCRIPTION TOTAL PRICE
3 boxes @ $802 boxes @ $501 Box @ $50
Belgian ChocolatesCrunch NutsJuicy Fruits
TOTAL $240TOTAL $100TOTAL $50
Deliver ASAP to the above address TOTAL $390
Delivery Notes
• Used by supplier– Confirm goods have been received– Sign when goods delivered
Invoices
• Sent to supplier from customer– Request for
payment for goods delivered
– Should be checked
Credit Notes
• Issued if a mistake has been made– Wrong goods
supplied– Shortage of
products– Wrong price
charged
Statement of Account
Statement of Account
To:Sweet Wholesalers LtdManor RoadNewtown
Sweet Wholesalers LtdManor Road, NewtownTel: 0381 862 3002Fax: 0381 862 3220Email: accounts @sweetwholsalers.comAccount: Abdul Sweets Ltd
Date Invoice No. Reference $ Value Outstanding
8/9/0913/9/0921/9/09
360421560
275X273Z2715A
240100390
Total 240Total 100Total 390
Total $630
Remittance Advice Slips
• Usually sent with “statement of account”• Indicates which invoice is being paid• No duplication
Receipts
• Issued when customer pays an invoice
Methods of Payment
Recording Accounting Transactions
Recording Accounting Transactions
Who uses the final accounts in business?
Trading Account (Basic)
• Shows how the gross profit of a business is calculated
Sales Revenue $50,000
Cost of Goods Sold $20,000
Gross Profit $30,000
Trading Account
Sales Revenue Cost of Goods Sold Gross Profit
3,000 1,500 ????
25,000 16,000 ????
80,000 ????? 20,000
????? 25,000 50,000
Trading Account (Typical)
Newtown Trading Ltd
Trading Account for year ending 31/3/10
Sales Revenue $55,000
Opening Stock $10,000
Purchases $25,000
Total Stock Available $35,000
Less Closing Stock $12,000
Cost of Goods Sold $23,000
Gross Profit $32,000
Trading Account
Cost Per Unit
OpeningStocks
Purchases of Goods
Closing Stocks
Cost of Goods Sold
$3 500 3,000 200 $9,900
$2 1,000 5,000 500 ?????
$5 100 400 300 ????
$1 2,000 60,000 2,000 ?????
Trading Account
• Manufacturing Business– Direct Labour & Direct Production Costs will
be deducted before arriving at the gross profit total
Any more deductions need to be
made?
Profit and Loss Account
• It shows how the “net profit” of a business and the retained profit of a company are calculated.
• Net Profit– Is the profit made by a
business after all costs have been deducted from sales revenue
– Gross Profits – Overhead Costs
Newtown Garden NurseryProfit and Loss Account
For the year ending 31/3/09
Gross Profit $32,000
Non-Trading Income $ 5,000
$37,000
Less Expenses:
Wages and Salaries $12,000
Electricity $ 6,000
Rent $ 3,000
Depreciation $ 5,000
Selling and Advertising Expenses $ 5,000
$31,000
Net Profits $ 6,000
Depreciation
• It is the fall in value of a fixed asset over time.
Profit and Loss Account for Limited Companies
• Appropriation Account– After tax is distributed– either as dividends or kept in the
company as retained earnings
• Retained Profit – The net profit reinvested back into
the business, after deducting tax and payments to owners, such as dividends
Profit and Loss Account for Limited Companies
20052004
($000) ($000)
Sales Turnover 1,2501,300
Cost of Sales 900 900
Gross Profit 350 400
Operating Expenses 105 120
Operating Profit 245 280
Interest Payable 50 40
Net Profit (Profit before Tax) 195 240
Corporation Tax 35 40
Profit After Tax 160 200
Dividends 120 130
Retained Profit 40 70
Profit and Loss Account for Limited Companies
20052004
($000) ($000)
Sales Turnover 1,2501,300
Cost of Sales 900 900
Gross Profit 350 400
Operating Expenses 105 120
Operating Profit 245 280
Interest Payable 50 40
Net Profit (Profit before Tax) 195 240
Corporation Tax 35 40
Profit After Tax 160 200
Dividends 120 130
Retained Profit 40 70
Try this!
• Using the pattern of a typical profit and loss account
• Calculate the retained profits of ABC Ltd for the year ending 31/3/2005 from the following data
Sales RevenueTax PaidOperating ExpensesCost of SalesInterest PaidDividends
($000) 280 40 30 100 15 25
Balance Sheet
• Balance Sheet– Shows the value of a businesses' assets and
liabilities at a particular time
• Assets– Items that are owned by the business– S-T (Current)– L-T (Fixed)
• Liabilities– Items owed by the business– S-T (Current)– L-T
Balance Sheet
• Fixed Assets– Items that are used by
the business for more than one year
• Current Assets– Items that are used by
the business for less than one year
– Cash, Stocks, and Debtors
Balance Sheet
• Long-Term Liabilities– Borrowings which do
not have to be repaid within one year
• Short-Term Liabilities – Borrowings which
have to be repaid within one year
Balance Sheet
• Owners Wealth (Shareholder’s wealth)– Total Assets – Total Liabilities
Age Engineering Balance Sheet as at 31/3/2005 ($000)
2005 2004
Fixed Assets
Land and Buildings 450 440
Machinery 700 600
1,150 1,040
Current Assets
Stocks 80 50
Debtors 50 60
Cash 10 15
140 125
Less
Current Liabilities
Creditors 65 40
Bank Overdraft 65 60
130 100
Working Capital (Net Current Assets) 10 25
Net Assets 1,160 1,065
Financed by:
Shareholders’ Funds
Share Capital 500 500
Profit and Loss Reserves 360 320
Long-Term Liabilities
Long-Term Bank Loan 300 245
Capital Employed 1,160 1,065
Balance Sheet Terms
• Working Capital (Net Current Assets)– Current Assets – Current Liabilities– Used to pay short-term debts
• Net Assets– Fixed Assets + (Current Assets – Current
Liabilities)– Fixed Assets + Working Capital– Net Value of Assets– Paid for by “shareholder funds” or “long-term
liabilities
Balance Sheet Terms
• Shareholder’s Funds– Total sum of money invested in the business
• Share capital– Money invested by shareholders
• Reserves– Retained Profits
• Capital Employed– Shareholder’s Funds + Long-Term Liabilities – Total long-term and permanent capital of a
business– Capital Employed = Net Assets
Where is it found?
• What was the gross profit of the business?
• What dividends did we pay our shareholders?
• What is the total value of our current assets?
• What expenses did the business incur last year?
• What was the net profit of the business?• What is the capital employed of the
business?
Categorize the following
Published Accounts
• What do published accounts tell us?– The performance of a company?– The financial strength of a company?
• Without further analysis, the answer is – not a great deal!
Ratio Analysis of Accounts
• Liquidity– It is the ability of a
business to pay back its short-term debt
Ratio Analysis of Accounts
• Performance Ratios– Return on Capital Employed
Operating Profit
X 100
Capital Employed
Ratio Analysis of Accounts
• Performance Ratios– Gross Profit Margin
Gross Profit
X 100
Sales Turnover
Ratio Analysis of Accounts
• Performance Ratios– Net Profit Margin
Net Profit Before Tax
X 100
Sales Turnover
Ratio Analysis of Accounts
• Liquidity Ratios– Current Ratio
Current Assets
Current Liabilities
Ratio Analysis of Accounts
• Liquidity Ratios– Acid-Test Ratio
Current Assets - Stocks
Current Liabilities
Ratio Analysis of Accounts
• Used to compare with– Other years– Other businesses
• Disadvantages– Based on past results, doesn’t indicate how a
business performance in the future– Results affected by inflation– Different accounting methods