Download - Business Accounting
S
IGCSE BUSINESS STUDIES
CHAPTER 7 – BUSINESS ACCOUNTING
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INDEX
WHAT ARE ACCOUNTS AND WHY ARE THEY NECESSARY
FINANCIAL DOCUMENTS INVOLVED IN BUYING AND SELLING
METHODS OF MAKING PAYMENT
WHO USES THE FINAL ACCOUNTS OF A BUSINESS
THE TRADING ACCOUNT
THE PROFIT AND LOSS ACCOUNT
BALANCE SHEETS
EXPLANATION OF BALANCE SHEET TERMS
ANALYSIS OF PUBLISHED ACCOUNTS
RATIO ANALYSIS OF ACCOUNTS
WHAT ARE ACCOUNTS AND WHY ARE THEY NECESSARY
There is a very big difference between accounts and accountants:ACCOUNTS are the financial records of one or more transactions.ACCOUNTANTS are the people who have the responsibility of keeping the accounts as accurate as possible.
Accountants, at the end of every financial year, need to produce the FINAL ACCOUNTS of the business. These tell business’ main financial results, and also how much the business is worth at that period of time. Limited companies also need to publish their final account.
FINANCIAL DOCUMENTS INVOLVED IN BUYING AND SELLING
Purchase orders – these are requests for products or services sent to suppliers.
Delivery notes – these needs to be signed by the customer to confirm that the order has been received.
Invoices – these are the requests for payment sent by the supplier. Credit notes – these are issued if a mistake has been made. Statement of account – a statement that each month the supplier will send
to his customers. Remittance advice slips – these are slips issued to make sure the customer
isn’t charged again for the invoices he has already paid. Receipts – a copy of the invoice that is kept by the customer
METHODS OF MAKING PAYMENT
Cash – the most common method of payment used for most small amounts.
Cheque – instructions to a bank to transfer a certain sum of bank balance to a specific person.
Credit card – this allows customers to buy goods and services and letting them pay in the future.
Debit card – these work the same way as credit cards but instead of credit being accumulated, the money is transferred directly to the the seller’s account.
WHO USES THE FINAL ACCOUNT OF A BUSINESS
Shareholders – they have a big interest in knowing how big the profit of loss of the company is.
Creditors – they have a big interest in knowing whether the company can pay back a loan.
Government – the government and the tax office will want to know bow much tax the business should pay.
Other companies – they will want to compare their business to other businesses to see how their business is performing.
THE TRADING ACCOUNT
It shows the difference between the COSTS OF GOODS SOLD and the SALES REVENUE
The difference is called GROSS PROFIT
IMPORTANT:Cost of goods sold does not have to be the same as the total value of goods bought by the businessGross profit does not make any allowance for overhead costs or expensesIn a manufacturing business the direct labor cost and the direct production costs will be deducted from the gross profit before arriving at the GROSS PROFIT TOTALThe gross profit is not the final profit of the business as all the expenses have to be deducted
THE PROFIT AND LOSS ACCOUNT
It shows how the NET PROFIT is calculated It begins with the gross profit calculated from the trading
account All other expenses and overheads of the business are
subtracted DEPRICIATION is the fall in the value of a fixed asset over
time
THE PROFIT AND LOSS ACCOUNTS FOR LIMITED COMPANIES
THE PROFIT AND LOSS ACCOUNT FOR LIMITED
COMPANIES It follows exactly the same principals as the
PROFIT AND LOSS ACCOUNT . The main differences are:
Corporation tax paid on company profits will have to be shown
Results from the previous year have to be included The final section of the profit and loss account is called
the APPROPRIATION ACCOUNT
BALANCE SHEETS
They are very different from the profit and loss account. The profit and loss account shows the income and expenses of a business over a
period of timeThe balance sheet shows the value or worth of a business at a particular moment in time
ASSETS are those items of value that are owned by the businessFixed assets – (Land, buildings, equipment and vehicles) they are likely to be kept by the business for more then a year, most of the fixed assets depreciate over time Current assets – (cash, stocks and debtors) they are only held for a short period of time
LIABILITIES are the items owed by the businessLong-term liabilities – they are long term borrowings (they do not have to be repaid within one year)Current liabilities – borrowings which must be repaid within one year
BALANCE SHEET TERMS
EXPLANATION OF BALANCE SHEET TERMS
Working capital (aka as net current assets). It is used to pay short term debtsWorking capital = Current assets – Current liabilities
Net assets = Fixed assets + Working capitalThese assets must be paid for by money but into the business in two ways : shareholders’ found and long-term liabilities
Shareholders’ founds is everything that is invested into the business by the owners of the companyShare capital – is the money put into the business when the shareholders bought newly issued sharesProfit and loss reserves are retained profits from current and previous years
Capital employed = Shareholders’ founds + long term liabilities CAPITAL EMPLOYED = NET ASSETS
ANALYSIS OF PUBLISHED ACCOUNTS
LIQUIDITY is the ability of a business to pay back it’s short term debts
It is important to choose more than one figure from the accounts when trying to find how a business is performing.
Comparing two features from one account is called RATIO ANALYSIS
RATIO ANALYSIS OF ACCOUNTS
There are two main types of ratios : PERFORMANCE RATIOS and, LIQUIDITY RATIOS
Disadvantages of ratio analysis
PERFORMANCE RATIOS
These are used to see how the business is performingThe three most common performance ratios are: RETURN ON CAPITAL EMPLOYED GROSS PROFIT MARGIN NET PROFIT MARGIN
Go back to “Ratio analysis of accounts”
RETURN ON CAPITAL EMPLOYED
This is calculated by the formulaReturn on capital employed (%) = Operating profit/Capital employed * 100This is how much the business was able to get back
from the capital it had employed
GO BACK TO PERFORMANCE RATIOS
GROSS PROFIT MARGIN
This is calculated by the formulaGross profit margin (%)= Gross profit / Sales turnover * 100
GO BACK TO PERFORMANCE RATIOS
NET PROFIT MARGIN
This is calculated by the formulaNet profit margin (%)= Net profit before tax / Sales turnover * 100
GO BACK TO PERFORMANCE RATIOS
LIQUIDITY RATIOS
These measure the ability of a business to pay back it’s short-term debts
Two common liquidity ratios are: CURRENT RATIOand ACID TEST or LIQUID RATIOGo back to “Ratio analysis of accounts”
CURRENT RATIO
This is calculated by the formulaCurrent ratio = Current assets / Current liabilities
GO BACK TO LIQUIDITY RATIOS
ACID TEST or LIQUID RATIO
This is calculated by the formulaAcid test or Liquid ratio = (Current assets – stocks) / Current liabilities
GO BACK TO LIQUIDITY RATIOS
DISADVANTAGES OF RATIO ANALYSIS
Ratios are based results collected on the past and therefore will not be able to show how a business might perform in the future
Accounting results over time will be affected by inflation
Different companies might use slightly different accounting methods
GO BACK TO RATIO ANALYSIS OF ACCOUNTS