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Financial and management accounting

Financial and management accounting Reference FINANCIAL AND MANAGEMENT ACCOUNTING Pauline Weetman Financial Times/Pitman Publishing Reference BUSINESS ACCOUNTING AND FINANCE Catherine Gowthorpe Thomson Learning 2003 Why construct accounts? An historical record of financial performance

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Financial and management accounting

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  1. Financial and management accounting

  2. Reference FINANCIAL AND MANAGEMENT ACCOUNTING Pauline Weetman Financial Times/Pitman Publishing

  3. Reference BUSINESS ACCOUNTING AND FINANCE Catherine Gowthorpe Thomson Learning 2003

  4. Why construct accounts? • An historical record of financial performance • Monitor of current performance • Aid to management decision making • Taxation and other statutory disclosures

  5. What is “accounting”? “….Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgements and decisions by users of the information….” A statement of basic accounting theory, American Accounting Association 1996

  6. Key accounting areas • Operating a process • Identification of financial information • Measuring financial information • Communicating financial information • Defining a business entity • Defining users • Defining judgements and decisions of users

  7. external internal Financial institutions BUSINESS ENTITY Owners Business partners Customers Management Government Employees Public interest Users of accounts

  8. Financial accounting External reporting of performance Management accounting Internal reporting mechanism that provides information for those who make decisions about the business entity Used to Direct attention Monitor performance Solve problems Accounting fields

  9. Conventions of accounting • Going concern • the entity is likely to remain in operation • Matching • comparison of revenue and expense over a similar period of time • Realisation • revenue should not be recognised until received and expenses not recognised until incurred • Consistency • Prudence • underestimating revenue and overestimating costs • Objectivity • exclude personal opinion

  10. Conventions of accounting • Verifiable • accounts should be capable of independent verification • Unit of measure • common denominator (£ or $ or not both) • Periodicity • entity performance over a consistent period of time • Duality • every action has a consequence • Materiality • actions have to materially affect the entity • Relevance – all information relevant to user to be included

  11. Financial statements for the external user • Primary financial statements • Trading Profit and Loss Account • measure of performance • Balance sheet • measure of financial position • Cash flow statement • measure of financial adaptability

  12. Secondary financial statements • Gross margin • Measure the performance of individual enterprises within the business

  13. Analysis statements • Disposal of funds statement

  14. The trading environment A PERIOD IN TIME MONEY IN MONEY OUT

  15. Receipts • Money received by the business

  16. Payments • Outgoings

  17. Cash • Cash is money • Cash is a physical transaction • “....anytime, anywhere, anyplace...”

  18. Cash items • I am giving you a £5 note • You are paying me £5 with a cheque • That crash has reduced the value of my car by £550

  19. Trading period • Accounts are related to a specific time period • Annual - taxation • Monthly - regular reporting on progress • Cash items are adjusted to take into account the trading period • Allows accounts to be compared on a like for like basis

  20. Terminology

  21. Trading items • Trading items relate to the payments and receipts made in order to utilize the capital assets contained within a business

  22. Capital items • Capital is a measurement of the worth of items which can realise a value eg Machinery items Building valuation Land

  23. Personal items • Personal items are payments or receipts made by the business on behalf of or to the owner eg Personal Drawings Income Tax

  24. The accounting equation ASSETS - LIABILITIES NET WORTH NET WORTH is equivalent to WEALTH

  25. Assets “….rights or other access to future economic benefits controlled by an entity as a result of past transactions or events….” ASB (1995) Statement of Principles for Financial Reporting

  26. Examples of assets • Land • Buildings • Machinery • Livestock • Deadstock • Debtors • Investments

  27. Assets • Fixed asset • An asset used by an enterprise for production • An asset intended for use on a continual basis • An asset not intended for sale • Current asset • An asset likely to be converted into cash within the trading period

  28. Liabilities “….obligations of an entity to transfer economic benefits as a result of past transactions or events….” ASB (1995) Statement of Principles for Financial Reporting

  29. Examples of liabilities • Overdraft • Loans • Mortgages • Creditors

  30. Liabilities • Long term (fixed) liabilities • Liabilities expected to remain in place beyond the next trading period (12 months) • Current liabilities • Liabilities likely to be repaid within the trading period (12 months)

  31. Effect of changes in accounting equation

  32. Balance sheet format • Companies Act 1985 • Specifies statutory format for companies reporting balance sheet • Small business have exemptions that produce a simplified format

  33. Balance sheet format – companies http://www.inlandrevenue.gov.uk/manuals/pummanual/specificguidance/pum4850.htm

  34. Simple balance sheet format

  35. Source of information for accounts • Cash book • Bank statements

  36. Cash flow • Flow of money into business over a period of time • Information sourced from the cash book • Cash book is a record of all cash transactions • Cash surplus/deficit

  37. The Cash Flow Statement

  38. Net Cash Flow • Positive • Money flowing IN to the business • Receipts > Payments • Negative • Money flowing OUT of the business • Receipts < Payments

  39. Cash Flow statement – annualised

  40. Cash Flow statement - periodic

  41. Effect of cash flow on bank balance • A positive net cash flow increases the bank balance • A negative net cash flow reduces the bank balance OPENING BANK BALANCE + NCF = CLOSING BANK BALANCE

  42. Cash Flow statement - periodic OPENING BALANCE = (£1400)

  43. Trading Profit and Loss Account • A measure of business financial performance during a specific time period • Statutory document • Demonstrates PROFIT or LOSS

  44. Trading Profit and Loss Account (TPLA) RECEIPTS (adjusted for debtors) plus CLOSING VALUE of stocks less PAYMENTS (adjusted for creditors) less OPENING VALUATION of stocks

  45. Revenue • Receipts attributable to a period in time

  46. Expenditure • Payments attributable to a period in time

  47. Trading valuations • Valuation of trading assets at the start and end of an accounting period that are used to operate the business • livestock, crops, cultivations • deadstock • Record the market value or the total cost to date at the start and end of an accounting period

  48. TPLA format

  49. Creditor and Debtor adjustment • Revenue = Receipts – Opening debtors + Closing debtors • Expenditure = Payments – Opening creditors + Closing creditors

  50. Debtors schedule

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