Tutor2u ™ GCSE Business Studies Revision Presentations 2004 Business Accounting

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GCSE Business GCSE Business StudiesStudiesRevision Presentations 2004Revision Presentations 2004

Business Accounting


GCSE Business GCSE Business StudiesStudies

What is Accounting?

There is no one agreed definition of accounting

Most commentators agree that accounting involves the

Process of identifying, measuring, recording and communicating financial information to permit informed judgements and decisions by users of the information

Collection & monitoring of financial data providing information about the activities of business



Who Uses Accounts?

Shareholders use accounts to monitor a company’s activities and performance and to decide whether to increase, hold or sell their shares

Managers use accounts to measure performance; inform decisions e.g. new investment or plant closure; monitor and control departments; set targets

Banks use accounts to decide whether or not to offer a loan, increase or withdraw an overdraft

Creditors use accounts to see if a firm is an acceptable credit risk or if they need to press for payment

Customers use accounts to decide if a firm is likely to survive into the future and supply after sales service

Government uses accounts to calculate tax payable on sales (VAT), profits (Corporation tax) and employees (national insurance and income tax collected at source (PAYE)

Staff and the wider community use accounts to evaluate if the organisation is stable or likely to close.



Roles of the Accounting Function

Administrative:

Record financial transactions

Collect money from sales

Pay suppliers, salaries and wages

Management information:

Prepare regular financial information e.g. monthly management accounts showing sales, costs and profits against budgets, forecasting cash flows, cost investigations

Providing other stakeholders with legal/vital information



Main Accounting Records

Sales ledger

Shows how much is owed by customers who have bought on credit

Used to help credit control

Purchase ledger

Shows how much is owed by business to suppliers who have provided goods and services on credit

Cash book and bank statements

Shows all transactions involving cash

E.g. receipts from customers, payments to suppliers, employee wages

Nominal (or “General”) ledger

Used to categorise transactions of a business under headings

E.g. sales of widgets, raw materials, electricity, postage



Financial Statements

Profit and loss account

Shows how business has traded for a specific period

Balance sheet

Shows the assets and liabilities of a business at a particular time, and how those assets and liabilities have been financed

Cash flow statement

Shows how cash has come into business and what it has been spent on



Profit and Loss Account

Shows whether a business has made a NET PROFIT or LOSS over a financial year.

Describes how profit or loss arose – e.g. categorising costs between “cost of sales” and operating costs

2000 2001 2002£'000 £'000 £'000

Revenue 10,150 12,535 15,100

Less cost of sales 4,250 4,700 5,950

Gross profit 5,900 7,835 9,150

Less expenses 4,235 5,675 6,480

Net profit 1,665 2,160 2,670

Gross Profit Margin 58.1% 62.5% 60.6%

Net Profit Margin 16.4% 17.2% 17.7%



Gross Profit and Gross Margin

Gross profit

Sales revenue (value of all goods sold) minus cost of making these products (cost of sales)

SALES – COST OF SALES = GROSS PROFIT

Gross margin

A profitability ratio

Calculated as gross profit divided by sales

Expressed as a percentage



Cost of Sales

Measures the costs directly associated with making products; e.g.

Raw materials & packaging

Cost of labour working directly on each product

Cost of running machines/equipment



Overheads

Costs not directly involved in production process

Cost of premises e.g. rent, insurance, repairs

Office costs e.g. stationery, postage, computer maintenance, staff salaries and wages

Sales and marketing costs e.g. salaries of salesmen, advertising

Finance costs e.g. bank charges, interest on bank loans



Revenue Expenditure and Capital Expenditure

Revenue expenditure

Money spent on goods and services which have been or will be consumed

E.g. Wages, raw materials

Capital expenditure

Money spent on long term assets which are used over and over again

E.g. Buildings; machinery; computer systems (hardware)



Net Profit

Calculated as gross profit less overheads

Final profit of business from its normal activities



Ways of Improving Gross Profit

Change to cheaper raw material suppliers

Redesign product to use fewer or cheaper materials

Increase selling prices

Offer fewer discounts to customers



Ways to Reduce Overheads

Reduce expenditure on promotional activities (e.g. advertising campaigns)

Move to cheaper premises

Combine jobs done by administrative staff to reduce employee numbers

Renegotiate cost of overheads such as legal and accounting fees



Balance Sheet

A snap shot of business at a point in time – “balance sheet date”

Shows what business OWNS, IS OWED and OWES

OWNS - Assets such as buildings, stock and cash

IS OWED - Money from debtors

OWES - Money to creditors and bank

PLUS owes money to investors/owners of business (they own profit)



Fixed Assets

Assets that provide a benefit for business for more than 12 months

Assets that business intends to keep

Land and buildings

Plant and machinery

Company cars



Depreciation

Assets reduce in value over its useful life due to wear and tear and obsolescence

Depreciation is an estimate of how much the value of fixed assets have fallen since they were bought

Reduces original value of an asset by charging an amount every year of its useful life to profit and loss account



Current Assets

Stocks – finished goods, work in progress and raw materials (note: also called “inventories”)

Debtors – people who owe business money

Cash –in bank and in cash box



Current Liabilities

Creditors – money owed by business in short term

Bank overdraft – amounts due within next 12 months



Provisions

Where business makes a charge against profits for something expected to happen

E.g. charging against profits a reduction in size of debtors because it is expected that a debtor owing money will fail to pay

This is called a bad debt.

A business might also decide to make a provision for some kind of claim against business – e.g. a legal claim for damages.



Capital

Amount of long-term money put into business to buy assets

Main forms of capital:

Owners money (share capital)

Retained profits (profit not paid out as dividends)

Long term bank loans



Cash flow Statement

Historical statement that shows movements of cash moving in and out of business

Split into two parts:

Sources of funds:

Where cash has come from (e.g. profits, increase in trade credit)

Use of funds

How the cash was used (e.g. purchase of assets, repayments on bank loans)

Different from a cash flow forecast which looks at future movement of cash



How Profitable Businesses Can Fail

A business can make a profit but have a negative cash flow.

Without enough cash to pay employees, suppliers, banks and taxes business will go bankrupt.

A business makes a profit when sales exceed costs.

Positive cash flow arises when payments from customers exceed payments to suppliers and employees. Cash may not be due from customers until next month, but bills and employees may have to be paid today.

This situation can give rise to negative cash flow, even though value of sales is greater than costs

Poor cash flow is one of main reasons why new businesses fail.



Accounting Statements Published by a Limited Company

Companies Act requires limited companies to produce several accounting statements

Published in the Annual Report and Accounts

Profit and loss account

Balance sheet

Cash flow statement

Note: sole traders and partnerships are not required to publish their accounting information publicly like companies. However, they will still need to produce accounts to show to the banks and to calculate tax payments

Documents

Tutor2u ™ GCSE Business Studies Revision Presentations 2004 Business Accounting