 | Accounting is a managerial and administrative tool that
involves the recording of financial transactions so that a clear summary of
what has happened to business money can be traced over time. |
| The main Accounting reports and statements include:
 | Balance Sheets- annual or interim balance sheets
|
| Budgets- cash budgets, sales/income budgets, balance
sheet budgets |
| Cash Flow Reports- statements of liquidity
|
| Revenue Statements- also called Profit and Loss
Statements of income statements |
|
| Accountability occurs when a business acts in the best
and highest interests of its owners. Full and complete disclosure which means
to be open and not hide the truth, ensures that the books of accounts are kept
accurately and that the information reflected in them, and which is summarised
in the reports, is based on the true and actual transactions. Another term for
accountability is stewardship. |
| Audits refer to a formal check of the accounting and
financial procedures used by the business. During such a check the auditor is
looking for areas where there could be problems with the financial process.
|
| Finance refers to how a business funds its activities-
for instance where it gets the money to trade, why it chooses to use certain
lenders- as well as the costs, risks and benefits of different types of
borrowings. |
| Debt finance: is money borrowed from external lenders.
| Default occurs when a business cannot meet its debt
repayment commitments. |
| Examples: credit cards, bridging finance, commercial
bills, bank overdraft, mortgages, targeted loans. |
| Sources: banks, non-banks, suppliers, etc.
|
| Factoring- selling your overdue debts to a factor
company which will collect the debts. |
| Lessors are the holders of capital that takes the
form of large equipment, specialist machinery, vehicles or land and
buildings. Lessor refers to the owner of capital that takes the form of
large equipment, specialist machinery, vehicles or land and buildings.
Lessee refers to the business or person who uses the lessor's capital
equipment and makes lease payments to the lessor. |
|
| Equity finance is money borrowed from internal lenders.
| Internal equity finance is raised from additional
contributions made by the owner and profit which is reinvested in the
business (retained earnings). |
| Externally raised equity comes from money raised from
altering the ownership structure of the business- issuing shares, admitting
a new partner. |
|
| Revenue statement is also called the profit and loss
statement (P&L) of the income statement. It is used primarily to help the
business to calculate how much profit it has made over a period of time.
|
| Profit refers to money earned by a business in the
course of operating that is in excess of costs, that is, money left over after
expenses are covered. Mathematically, it is simply the income from all sources
less all costs and expenses. |
| Net sales= sales revenue - sales returns. |
| Gross profit= Sales - COGS |
| COGS (cost of goods sold)= Opening stock + purchases -
closing stock. |
| Expenses can be:
| Selling- relating to the process of selling the good
or service and can be directly traced to the need for sales. e.g.
commission, salary, wages, advertising, delivery expense, electricity,
depreciation on shop fittings. |
| Administration- costs directly related to the general
running of the business. e.g. stationary, office salaries, rent, rates,
telephone, depreciation on buildings, audit costs, accountant's fees,
insurances. |
| Financial- costs associated with borrowing money from
outside people or organisation. e.g. interest payments, lease payments,
dividends. |
|
| Operating means occurring in the normal course of
trading and refers to predictable and recurring items. |
| Non-operating refers to unusual, unexpected and
unpredictable items that affect income either favourably or unfavourably.
|
| Balance sheets list:
| Assets- items of value. |
| Liabilities- items of debt owed to other
organisations |
| Owner's Equity- the value of assets less the value of
debts- what the owner gets after all debts are paid. |
| The accounting equation: Assets=Liabilities+Owner's
Equity. |
|
| Cash-flow statements measure liquidity: Liquidity
refers to the amount of cash a business has access to and how readily it can
convert its assets into cash so that debt can be paid. |
