F: Reference code, where other information is held
: Amount of money involved in transaction
7. There Are 4 Types of Accounts
Expense accounts:
Record the cost of goods and services used by the business(e.g. purchases, rent)
Income accounts:
Record the earnings of the business (e.g. sales)
Asset Accounts:
Record what is owned by the business
Liability Accounts:
Record what is owed by the business, including to the owner (capital)
8. Ledgers and Accounts
To debit an account an entry is recorded on the left hand side
To credit an account an entry is recorded on the right hand side
The accounts are kept in a book called aledger .
9. Useful Definitions
Book-keeping - recording financial information
Accounting (financial)
Uses information from book-keeping records to prepare financial statements
10. Useful Definitions
Financial statements
- The profit and loss account and the balance sheet
Cost accounting
How much does something cost to produce
Management accounting
Uses cost accounting to forecast, control and evaluate costs
11. Business Organisations
Types of business
Private
Sole traders, partnerships, companies, clubs
Public sector
Government bodies and nationalised industries
12. Sole Trader
One-man business unit
Capital is raised by the private resources of one person
May also include borrowings
Personally liable for all debts
13. Parternerships
Anything from 2 to 20 partners
Each partner contributing private resources
May also include borrowings
Personally liable for all debts of business
Subject to partnership agreement
14. Limited Companies
2 types private (LTD) or public (PLC)
Limited companies have limited liability.
This means that in the event of a companies collapse, shareholders are protected against the debts of a company. They may lose their paid-up capital, but nothing more. This is not the case for sole-traders or partnerships.
15. Private Limited Company (LTD)
No restriction to number of shareholders
But can only sell shares privately (without advertising)
This in itself will limit the number of shareholders
Generally see shares of limited companies being sold within boundaries of families,friends and business acquaintances
16. Public Limited Companies (PLC)
Can issue a prospectus (invitation to the public to buy its shares)
Shareholders then become part-owners of their companies.
They receive dividends from company profits
Shares may increase or decrease in value
17. Sources of Finance
Owners capital
Loan capital
Debentures
Profits
Leasing/ hiring of fixed assets
Creditors
Government
18. Owners Capital
Resources put into the business by the owner
Limited companies have shareholders
For PLC authorised capital how much it can raise
19. Owners Capital
The shares issued and purchased by shareholders are known as issued and paid-up capital
This may be less than or equal to the authorised capital
20. Classes of Shares
2 types of shares ordinary and preferential
Ordinary shares: most common, often referred to as equity.
Directors decide what is paid out as dividends and how much they want to keep in the company.
Interim and final dividends
Ordinary shareholders paid last!
21. Preferential Shares
Fixed rate of dividend(e.G 10% preferential shares)
Cumulative preference shares allows arrears of dividends to be paid
Participating preference shares may allow an additional bonus (if ordinary dividend is higher)
22. Rights Issue
Where existing shareholders are invited to buy the new issue first being offered in proportion to their existing shareholding
Generally offered at a favourable price
23. Loan Capital
Loans shortterm (less than 1 year), medium-term (2 to 5 years), long-term (up to 20 years)
Short-term generally used for day to day running of a business (eg. Overdraft)
Medium and long-term purchase machinery, buildings, etc
Generally provided by banks
24. Debenture Issues
Debentures are loan capital- issued by companies for the purpose of financing over a specific period of time (e.G 5 or 10 years)
Interest is then paid to the debenture holder at a fixed percentage of the nominal value of the stock even if no profits are made
Normally secured against assets of company
25. Debenture Issues
Debentures are sold in blocks of 100 and this amount is repaid to debenture holder when the debenture matures
Debentures can also be sold on the stock exchange
Value is not determined by the future profts of the company but of interest rates available elsewhere
26. Profits
Profits can be ploughed back into the business to finance future financial needs
Companies who retain their profits can transfer them to what is known as a P and L reserve, that is to leave it to accumulate in the profit and loss account
27. Leasing/ Hiring Fixed Assets
Hire purchase: expensive form of credit. Asset only becomes legal property of the business when last payment is made.
Leases 2 types operating and finance
Operating lease merely a form a rental. Rental amount deducted from profts
Finance lease depreciation and interest charges can be written off against profits
28. Factor Finance
Pass all trade debts to a factoring company who pay the company a major percentage of the debts immediately and the balance when the debts are collected. (Done for cash flow purposes)
29. Factor Finance
Factoring company charges interest on the sum advanced until the debts are paid plus an administration feefor the service
Without recourse often factoring company bears any loss as a result of bad debts
