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 Accountants 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 Ltd Manor Road Newtown Abdul Sweets Ltd 15 Old Road Tel: 0381 865 4121 Fax: 0381 865 4022 Date: 18/4/10 Order No: 02/136 QUANTITY DESCRIPTION TOTAL PRICE 3 boxes @ $80 2 boxes @ $50 1 Box @ $50 Belgian Chocolates Crunch Nuts Juicy Fruits TOTAL $240 TOTAL $100 TOTAL $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 Ltd Manor Road Newtown Manor Road, Newtown Tel: 0381 862 3002 Fax: 0381 862 3220 Email: accounts @sweetwholsalers.com Account: Abdul Sweets Ltd Date Invoice No. Reference $ Value Outstanding 8/9/09 13/9/09 21/9/09 360 421 560 275X 273Z 2715A 240 100 390 Total 240 Total 100 Total 390 Total $630 Issued each month Payments and credits made Know money owed for each invoice

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 Sales Revenue P x Q Cost of Goods Sold Cost of producing / buying goods for sale Gross Profit  Occurs when Sales Revenue – Cost of Goods Sold

Trading Account Sales Revenue Cost of Goods Sold Gross Profit 3,000 1,500 ???? 25,000 16,000 80,000 ????? 20,000 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 Opening Stocks Purchases of Goods Closing Cost of Goods Sold $3 500 3,000 200 $9,900 $2 1,000 5,000 ????? $5 100 400 300 ???? $1 2,000 60,000

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? Expenses Salaries Lighting Rent

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 Nursery Profit 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 2005 2004 ($000) ($000) Sales Turnover 1,250 1,300 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 2005 2004 ($000) ($000) Sales Turnover 1,250 1,300 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 Revenue Tax Paid Operating Expenses Cost of Sales Interest Paid Dividends ($000) 280 40 30 100 15 25

Balance Sheet Balance Sheet Assets Liabilities 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 L-T

Balance Sheet Fixed Assets Current 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 Short-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) Net 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 Capital Employed 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