Introduction to Finance & Accounts BTEC Business Nationals Unit 5 – An Introduction to Accounting

Definitions & Assumptions Accounting The collection, recording, compiling and forecasting of financial information Financial Accounting Management Accounting

Definitions & Assumptions Financial Accounting Gathering and publishing information of financial record. All limited companies publish their accounts each financial year These accounts are available at Companies’ House

Definitions and Assumptions Management Accounting Accounting statements produced for management purposes Planning, decision making review and control

Overview Why businesses need accounts Major accounting documents Users of published accounts Raising Finance Accounting today

Why do businesses need accounts? Management Accounting Ensures firms keep a careful check on their cash flow/working capital Gives the opportunity to plan ahead Identify costs/selling price Work out break even/profit points Measure how well staff are performing Control expenditure

Why do businesses need accounts? Financial accounts To obtain bank loans/finance Auditing purposes (by a range of external users)

Management Accounting V Financial Accounting Focuses on the present and the future Reports what happened in the past Is for internal users Is for external users Needs to be easy to use, relevant and up to date Needs to be reliable, accurate and consistent Is ruled by managers’ requirements Is ruled by accounting conventions and legal requirements Covers departments and divisions Covers the whole firm

Major Accounting Documents Financial accounting Balance sheet Profit & loss account Cash flow statement

Balance sheet A snapshot of a firms assets, liabilities and sources of capital What is the business worth? Can it afford to expand? Is it a safe investment?

Profit & Loss Account The level of profit made in the most recent trading period Profit = Revenue – Costs/expenses Is the firm trading successfully? Are the senior managers proving effective? Is it likely to be a profitable investment?

Cash flow statement This appears in the published financial accounts of public limited accounts only Where cash has come from & where iit has been used over the past year How easily was the firm able to find the cash to finance its recent activities? Was the finance generated from within the business, or was outside finance needed?

Major Accounting Documents Management accounting Cash flow forecasts Budgets Contribution statements Investment appraisal Break-even charts

Cash flow forecasts An estimate of what the firm’s bank account will look like in the each month of the coming year If an overdraft is predicted, financial arrangements can be made

Budgets Financial plans which can be set for costs and/or revenues Used to coordinate, motivate and control the key activities within a business in the coming year

Contribution statements Set out the contribution to overheads made by each division or department of a firm Helps make decisions about allocating resources between different parts of the business More capital to finance expansion of the most profitable product area

Investment appraisal These calculations help decide whether a prospective investment project is financially attractive Buying new machinery Building a new factory etc

Break even charts Indicate revenues and costs, and therefore profit at all possible levels of output They enable a break even point, where neither a profit nor a loss are made Used in decision making: Pricing Cost cutting Expansion