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Chapter 7 – Business Accounting
Syllabus Unit – Business Finance and Accounting
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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
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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
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Why are accounts necessary?
Collection of money from customers Ordering stock within limits Cash flow Profit/Loss Tax
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Financial Documents involved in Buying & Selling
Purchase Order Delivery Notes Invoices Credit Notes Statement of Accounts Remittance Advice Slips Receipts
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Purchase Order Purchase Order To: Sweet Wholesalers Ltd Manor Road
Newtown Abdul Sweets Ltd 15 Old Road Tel: Fax: Date: 18/4/10 Order No: 02/136 QUANTITY DESCRIPTION TOTAL PRICE 3 $80 2 $50 1 $50 Belgian Chocolates Crunch Nuts Juicy Fruits TOTAL $240 TOTAL $100 TOTAL $50 Deliver ASAP to the above address TOTAL $390
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Delivery Notes Used by supplier Confirm goods have been received
Sign when goods delivered
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Invoices Sent to supplier from customer
Request for payment for goods delivered Should be checked
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Credit Notes Issued if a mistake has been made Wrong goods supplied
Shortage of products Wrong price charged
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Statement of Account Statement of Account To: Sweet Wholesalers Ltd
Manor Road Newtown Manor Road, Newtown Tel: Fax: 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
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Remittance Advice Slips
Usually sent with “statement of account” Indicates which invoice is being paid No duplication
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Receipts Issued when customer pays an invoice
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Methods of Payment
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Recording Accounting Transactions
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Recording Accounting Transactions
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Who uses the final accounts in business?
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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
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Trading Account Sales Revenue Cost of Goods Sold Gross Profit 3,000 1,500 ???? 25,000 16,000 80,000 ????? 20,000 50,000
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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
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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
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Trading Account Manufacturing Business
Direct Labour & Direct Production Costs will be deducted before arriving at the gross profit total
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Any more deductions need to be made?
Expenses Salaries Lighting Rent
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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
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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
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Depreciation It is the fall in value of a fixed asset over time.
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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
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Profit and Loss Account for Limited Companies
($000) ($000) Sales Turnover 1,250 1,300 Cost of Sales Gross Profit Operating Expenses Operating Profit Interest Payable Net Profit (Profit before Tax) Corporation Tax Profit After Tax Dividends Retained Profit
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Profit and Loss Account for Limited Companies
($000) ($000) Sales Turnover 1,250 1,300 Cost of Sales Gross Profit Operating Expenses Operating Profit Interest Payable Net Profit (Profit before Tax) Corporation Tax Profit After Tax Dividends Retained Profit
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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
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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
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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
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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
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Balance Sheet Owners Wealth (Shareholder’s wealth)
Total Assets – Total Liabilities
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Age Engineering Balance Sheet as at 31/3/2005 ($000)
Fixed Assets Land and Buildings Machinery 1,150 1,040 Current Assets Stocks Debtors Cash Less Current Liabilities Creditors Bank Overdraft Working Capital (Net Current Assets) Net Assets 1,160 1,065 Financed by: Shareholders’ Funds Share Capital Profit and Loss Reserves Long-Term Liabilities Long-Term Bank Loan Capital Employed 1,160 1,065
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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
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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
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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?
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Categorize the following
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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!
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Ratio Analysis of Accounts
Liquidity It is the ability of a business to pay back its short-term debt
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Ratio Analysis of Accounts
Performance Ratios Return on Capital Employed Operating Profit X 100 Capital Employed
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Ratio Analysis of Accounts
Performance Ratios Gross Profit Margin Gross Profit X 100 Sales Turnover
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Ratio Analysis of Accounts
Performance Ratios Net Profit Margin Net Profit Before Tax X 100 Sales Turnover
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Ratio Analysis of Accounts
Liquidity Ratios Current Ratio Current Assets Current Liabilities
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Ratio Analysis of Accounts
Liquidity Ratios Acid-Test Ratio Current Assets - Stocks Current Liabilities
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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
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