1. Chapter 7 Business Accounting
By the end of this chapter, candidates will be able to :
To understand why businesses keep accounting records and how they use them
To analyze the needs of the different users of business accounts
To understand the construction of simple balance sheet
To understand the construction of simple profit and loss accounts
To analyze business accounts using ratios

2. What is a “Profit and Loss account”?
An account that records business sales revenues, all costs and expenses, and any loss/profit made during the year.
Often it is referred to as “ Trading Account”
ABD Traders Ltd -
Profit and Loss Account for year ending 31/9/04
Amount ( $)
Item
12000
Sales turnover
4000
Cost of goods sold
8000
Gross Profit
-3000
Overheads
5000
Net Profit

3. What is a “ Sales Turnover”?
The value of sales in a certain period of time.
Often is referred to as Sales Revenues
Product
Unit Price
Quantity Sold
Sales Turnover ( Revenues)l
$ 150
4 Units
$ 600

4. Sales Turnover ( Revenues)l
Gross Profit
Profits after subtracting the cost of sales from sales turnover.
Products
Quantity Sold
Unit Price
Sales Turnover ( Revenues)l
4 Units
$ 150
$ 600
Products
Quantity Sold
Unit cost
Cost
4 Units
$ 80
$ 320
$ 280
GROSS PROFIT

5. Net Profit
Profit after subtracting all expenses/ overheads from gross profit.
Products
Fixed
$ 80
Cost
Total Cost = $ 130 X 4 Units = $ 520
Variable
$50
Total Sales = $ 150 X 4 Units = $ 600
Net Profit
Total Sales
Total Cost
$ 80
Total Sales = $ 150 X 4 Units = $ 600
Total Cost = $ 130 X 4 Units = $ 520

6. Corporation Tax Tax on a company’s NET PROFIT.
Assuming that a company is making $ 5000 NET PROFIT, and that the ratio of tax imposed by the government is 25%, then, the company will pay (as a corporation tax) the amount of $ 1250.
$ 5000 X 25 / 100 = $ 1250

7. What is DIVIDENT? DATA G 11 Ltd consists of 5 shareholders
Partner 1: $ 5000
Partner 2: $ 5000
Partner 3: $ 5000
Partner 4: $ 5000
Partner 5: $ 5000
DATA
G 11 Ltd consists of 5 shareholders
2012 records showed $ NET PROFITS
Total company capital is $ 1 M
Shareholders financed the capital on 20% contract.
Distribution of DIVIDENTS (shares) on shareholders:

8. The fall of value of fixed assets over time.
Depreciation
The fall of value of fixed assets over time.

9. Liquidity (CURRENT RATIO)
The ability of the business to convert its assets into cash and pay off short-term debts.

10. Return on capital employed (%) “ROCE”
To deduct certain amounts of profits, over a defined period of time to collect back the value of a fixed capital. Calculations:
Net Profit / Capital Employed X 100 = Ration of ROCE

11. Retained Profit. ( RESERVES)
Profit made after payment of tax and dividends. It is reinvested back into the business.

12. Formula Formula Term Gross Profit/Sale Turnover X 100
Gross Profit Margin (%)
Net Profit/Sale Turnover X 100
Net profit Margin (%)
Current Assets
Current Liability
Current Ratio (COMPANY LIQUIDITY)
Current Assets - Stock
Asset Test Ratio
Net Profit
Capital Employed
Return on capital employed (%)

13. Working capital
The capital (MONEY) needed by a business to finance its day-to-day needs.

14. Fixed Vs Current Assets
Fixed Assets are owned by a business that expects to keep and use for more than one year. (Buildings – cars – machines – equipment – furniture … etc. ) Current Assets are Assets that the business will use up or turn into cash within one year. (Stocks, debtors, cash.)

15. Current liabilities
Loans and debts of the business that will be repaid within one year. (Bank overdraft and creditors.)

16. Balance sheet
An account that records all business assets and liabilities and the value of shareholders' funds.

17. Long-term Liabilities
The money value of debts that do not have to be repaid in one year.

18. Shareholders’ Funds
Finance provided by shareholders - share capital or retained profits. Share capital is from sale of shares. Retained profits are called reserves.

19. Capital Employed
Total value of business's long-term finance. Long-term liabilities plus shareholders' funds.

20. Table 1: Financial information about City Café Ltd. ($000)
1- State and explain two ways in which the owners of City Café Ltd might use the net profits of the business. (identifying the uses of net profit AND briefly explaining each use.) 2- Using figures from Table 1 and a ratio, analyze the liquidity of the company. (Define liquidity, then write down the formula.) 3- Using the figures in Table 1 and ratio analysis, evaluate the performance of the City Cafe Ltd between 2004 and (Company Performance is measured by how much net profit is won. )
2004
2005
Sale Revenues
200
250
Net Profit 25 15
Current Liabilities 20
Current Assets 50
Capital Employed
300