Chapter 7 – Business Accounting

1. Chapter 7 – Business Accounting Syllabus Unit – Business Finance and Accounting

2. You will learn ……………. • What is meant by “accounts” • Why businesses need to keep accounting records and use financial documents • Who uses these accounting records • What final accounts of a company contain • Profit and Loss Account • Balance Sheet • How the published accounts can be used to analyse the performance of a business

3. Introduction • Accounts • The financial records kept by a business • Accountants • Professionally qualified people who have the responsibility for keeping accurate accounts and for producing the final accounts

4. Why are accounts necessary? • Collection of money from customers • Ordering stock within limits • Cash flow • Profit/Loss • Tax

5. Financial Documents involved in Buying & Selling • Purchase Order • Delivery Notes • Invoices • Credit Notes • Statement of Accounts • Remittance Advice Slips • Receipts

6. Purchase Order

7. Delivery Notes • Used by supplier • Confirm goods have been received • Sign when goods delivered

8. Invoices • Sent to supplier from customer • Request for payment for goods delivered • Should be checked

9. Credit Notes • Issued if a mistake has been made • Wrong goods supplied • Shortage of products • Wrong price charged

10. Statement of Account

11. Remittance Advice Slips • Usually sent with “statement of account” • Indicates which invoice is being paid • No duplication

12. Receipts • Issued when customer pays an invoice

13. Methods of Payment

14. Recording Accounting Transactions

15. Recording Accounting Transactions

16. Who uses the final accounts in business?

17. Trading Account (Basic) • Shows how the gross profit of a business is calculated Sales Revenue $50,000 Cost of Goods Sold $20,000 Gross Profit $30,000

18. Trading Account

19. Trading Account (Typical) Newtown Trading Ltd Trading Account for year ending 31/3/10 Sales Revenue $55,000 Opening Stock $10,000 Purchases $25,000 Total Stock Available $35,000 Less Closing Stock $12,000 Cost of Goods Sold $23,000 Gross Profit $32,000

20. Trading Account

21. Trading Account • Manufacturing Business • Direct Labour & Direct Production Costs will be deducted before arriving at the gross profit total

22. Any more deductions need to be made?

23. Profit and Loss Account • It shows how the “net profit” of a business and the retained profit of a company are calculated. • Net Profit • Is the profit made by a business after all costs have been deducted from sales revenue • Gross Profits – Overhead Costs

24. Newtown Garden NurseryProfit and Loss AccountFor the year ending 31/3/09 Gross Profit $32,000 Non-Trading Income $ 5,000 $37,000 Less Expenses: Wages and Salaries $12,000 Electricity $ 6,000 Rent $ 3,000 Depreciation $ 5,000 Selling and Advertising Expenses $ 5,000 $31,000 Net Profits $ 6,000

25. Depreciation • It is the fall in value of a fixed asset over time.

26. Profit and Loss Account for Limited Companies • Appropriation Account • After tax is distributed • either as dividends or kept in the company as retained earnings • Retained Profit • The net profit reinvested back into the business, after deducting tax and payments to owners, such as dividends

27. Profit and Loss Account for Limited Companies 20052004 ($000)($000) Sales Turnover 1,250 1,300 Cost of Sales 900900 Gross Profit 350 400 Operating Expenses 105120 Operating Profit 245 280 Interest Payable 5040 Net Profit (Profit before Tax) 195 240 Corporation Tax 3540 Profit After Tax 160 200 Dividends 120130 Retained Profit 40 70

28. Profit and Loss Account for Limited Companies 20052004 ($000)($000) Sales Turnover 1,250 1,300 Cost of Sales 900900 Gross Profit 350 400 Operating Expenses 105120 Operating Profit 245 280 Interest Payable 5040 Net Profit (Profit before Tax) 195 240 Corporation Tax 3540 Profit After Tax 160 200 Dividends 120130 Retained Profit 40 70

29. Try this! • Using the pattern of a typical profit and loss account • Calculate the retained profits of ABC Ltd for the year ending 31/3/2005 from the following data

30. Balance Sheet • Balance Sheet • Shows the value of a businesses' assets and liabilities at a particular time • Assets • Items that are owned by the business • S-T (Current) • L-T (Fixed) • Liabilities • Items owed by the business • S-T (Current) • L-T

31. Balance Sheet • Fixed Assets • Items that are used by the business for more than one year • Current Assets • Items that are used by the business for less than one year • Cash, Stocks, and Debtors

32. Balance Sheet • Long-Term Liabilities • Borrowings which do not have to be repaid within one year • Short-Term Liabilities • Borrowings which have to be repaid within one year

33. Balance Sheet • Owners Wealth (Shareholder’s wealth) • Total Assets – Total Liabilities

34. Age Engineering Balance Sheet as at 31/3/2005 ($000) 20052004 Fixed Assets Land and Buildings 450 440 Machinery 700600 1,150 1,040 Current Assets Stocks 80 50 Debtors 50 60 Cash 10 15 140 125 Less Current Liabilities Creditors 65 40 Bank Overdraft 65 60 130 100 Working Capital (Net Current Assets) 10 25 Net Assets 1,160 1,065 Financed by: Shareholders’ Funds Share Capital 500 500 Profit and Loss Reserves 360 320 Long-Term Liabilities Long-Term Bank Loan 300245 Capital Employed1,160 1,065

35. Balance Sheet Terms • Working Capital (Net Current Assets) • Current Assets – Current Liabilities • Used to pay short-term debts • Net Assets • Fixed Assets + (Current Assets – Current Liabilities) • Fixed Assets + Working Capital • Net Value of Assets • Paid for by “shareholder funds” or “long-term liabilities

36. Balance Sheet Terms • Shareholder’s Funds • Total sum of money invested in the business • Share capital • Money invested by shareholders • Reserves • Retained Profits • Capital Employed • Shareholder’s Funds + Long-Term Liabilities • Total long-term and permanent capital of a business • Capital Employed = Net Assets

37. Where is it found? • What was the gross profit of the business? • What dividends did we pay our shareholders? • What is the total value of our current assets? • What expenses did the business incur last year? • What was the net profit of the business? • What is the capital employed of the business?

38. Categorize the following

39. Published Accounts • What do published accounts tell us? • The performance of a company? • The financial strength of a company? • Without further analysis, the answer is – not a great deal!

40. Ratio Analysis of Accounts • Liquidity • It is the ability of a business to pay back its short-term debt

41. Ratio Analysis of Accounts • Performance Ratios • Return on Capital Employed Operating Profit X 100 Capital Employed

42. Ratio Analysis of Accounts • Performance Ratios • Gross Profit Margin Gross Profit X 100 Sales Turnover

43. Ratio Analysis of Accounts • Performance Ratios • Net Profit Margin Net Profit Before Tax X 100 Sales Turnover

44. Ratio Analysis of Accounts • Liquidity Ratios • Current Ratio Current Assets Current Liabilities

45. Ratio Analysis of Accounts • Liquidity Ratios • Acid-Test Ratio Current Assets - Stocks Current Liabilities

46. Ratio Analysis of Accounts • Used to compare with • Other years • Other businesses • Disadvantages • Based on past results, doesn’t indicate how a business performance in the future • Results affected by inflation • Different accounting methods