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Chapter 7 Business Accounting By the end of this chapter, candidates will be able to : To understand why businesses keep accounting records and how they.

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Presentation on theme: "Chapter 7 Business Accounting By the end of this chapter, candidates will be able to : To understand why businesses keep accounting records and how they."— Presentation transcript:

1 Chapter 7 Business Accounting By the end of this chapter, candidates will be able to : To understand why businesses keep accounting records and how they use them To analyze the needs of the different users of business accounts To understand the construction of simple balance sheet To understand the construction of simple profit and loss accounts To analyze business accounts using ratios

2 What is a Profit and Loss account? An account that records business sales revenues, all costs and expenses, and any loss/profit made during the year. Often it is referred to as Trading Account Amount ( $)Item 12000Sales turnover -4000Cost of goods sold 8000Gross Profit -3000Overheads 5000Net Profit ABD Traders Ltd - Profit and Loss Account for year ending 31/9/04

3 What is a Sales Turnover? The value of sales in a certain period of time. Often is referred to as Sales Revenues Product Unit Price $ Units Quantity Sold $ 600 Sales Turnover ( Revenues)l

4 Gross Profit Profits after subtracting the cost of sales from sales turnover. Products Unit Price $ Units Quantity Sold $ 600 Sales Turnover ( Revenues)l Products Unit cost $ 80 4 Units Quantity Sold $ 320 Cost $ 280 GROSS PROFIT

5 Net Profit Profit after subtracting all expenses/ overheads from gross profit. Products Cost Fixed $ 80 Variable $50 Total Cost = $ 130 X 4 Units = $ 520 Total Sales = $ 150 X 4 Units = $ 600 Total Sales Total Cost Net Profit Total Sales = $ 150 X 4 Units = $ 600Total Cost = $ 130 X 4 Units = $ 520 $ 80

6 Corporation Tax Tax on a companys NET PROFIT. Assuming that a company is making $ 5000 NET PROFIT, and that the ratio of tax imposed by the government is 25%, then, the company will pay (as a corporation tax) the amount of $ $ 5000 X 25 / 100 = $ 1250

7 What is DIVIDENT? Partner 1: $ 5000 Partner 2: $ 5000 Partner 3: $ 5000 Partner 4: $ 5000 Partner 5: $ 5000 DATA G 11 Ltd consists of 5 shareholders 2012 records showed $ NET PROFITS Total company capital is $ 1 M Shareholders financed the capital on 20% contract. Distribution of DIVIDENTS (shares) on shareholders:

8 Depreciation The fall of value of fixed assets over time.

9 Liquidity (CURRENT RATIO) The ability of the business to convert its assets into cash and pay off short-term debts.

10 Return on capital employed (%) ROCE To deduct certain amounts of profits, over a defined period of time to collect back the value of a fixed capital. Calculations: Net Profit / Capital Employed X 100 = Ration of ROCE

11 Retained Profit. ( RESERVES) Profit made after payment of tax and dividends. It is reinvested back into the business.

12 Formula Term Gross Profit/Sale Turnover X 100Gross Profit Margin (%) Net Profit/Sale Turnover X 100Net profit Margin (%) Current Assets Current Liability Current Ratio (COMPANY LIQUIDITY) Current Assets - Stock Current Liability Asset Test Ratio Net Profit Capital Employed Return on capital employed (%)

13 Working capital The capital (MONEY) needed by a business to finance its day-to-day needs.

14 Fixed Vs Current Assets Fixed Assets are owned by a business that expects to keep and use for more than one year. (Buildings – cars – machines – equipment – furniture … etc. ) Current Assets are Assets that the business will use up or turn into cash within one year. (Stocks, debtors, cash.)

15 Current liabilities Loans and debts of the business that will be repaid within one year. (Bank overdraft and creditors.)

16 Balance sheet An account that records all business assets and liabilities and the value of shareholders' funds.

17 Long-term Liabilities The money value of debts that do not have to be repaid in one year.

18 Shareholders Funds Finance provided by shareholders - share capital or retained profits. Share capital is from sale of shares. Retained profits are called reserves.

19 Capital Employed Total value of business's long-term finance. Long-term liabilities plus shareholders' funds.

20 Table 1: Financial information about City Café Ltd. ($000) 1- State and explain two ways in which the owners of City Café Ltd might use the net profits of the business. (identifying the uses of net profit AND briefly explaining each use.) 2- Using figures from Table 1 and a ratio, analyze the liquidity of the company. (Define liquidity, then write down the formula.) 3- Using the figures in Table 1 and ratio analysis, evaluate the performance of the City Cafe Ltd between 2004 and (Company Performance is measured by how much net profit is won. ) Sale Revenues Net Profit2515 Current Liabilities20 Current Assets5020 Capital Employed300


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