Adrienne Gallagher Notes

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Lecturer: Adrienne Gallagher HETAC notes

Text of Adrienne Gallagher Notes

  • 1. Introduction To Accounting
    • Accountants Types of Accountants/qualifications
  • ACA, ACCA, ACMA, CPA, AAT, IATA
  • What is it all about?
  • Accounting is sets of figures about resources.
  • For a business:
  • What have they got
  • What they used to have
  • The change in what they have got
  • What they may have in the future

2. Users of Accounting information:

  • Equity Investor Groups (existing and potential shareholders)
  • Loan creditor groups
  • Employees
  • Analyst adviser (e.g. stockbrokers)
  • Business contacts competitors, creditors, customers
  • Government (e.g. revenue)
  • Public (e.g. consumer and environmental groups)

3. Attributes of Useful Accounting Information:

  • Relevant to the user
  • Understandability
  • Reliability (checked by auditors)
  • Complete (gives total picture)
  • Objective (unbiased)
  • Timeliness
  • Comparability (from year to year and from business to business)

4. Double Entry Book-keeping

  • Double Entry Book-keeping -System is based on the simple idea that for every transaction there is adouble action a giving and a receiving
  • For example if we purchase a car by cheque
  • Car is received
  • Money is given
  • Each transaction is recorded twice
  • -once on the debit side
  • And again on the credit side of the corresponding account

5. Layout of an account

  • Account ____________
  • Debit Side |Credit Side
  • (Often referred to a T- account)

6. Detailed Layout of an Account

  • Account Name
  • -------------------------------------------------------
  • Date|Details| f || Date|Details| f |
  • Date: Date of entry
  • Details: Name of corresponding account
  • 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

30. Creditors

  • Important sour