Presentation on theme: "Chapter 7 Business Accounting"— 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 themTo analyze the needs of the different users of business accountsTo understand the construction of simple balance sheetTo understand the construction of simple profit and loss accountsTo 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”ABD Traders Ltd -Profit and Loss Account for year ending 31/9/04Amount ( $)Item12000Sales turnover4000Cost of goods sold8000Gross Profit-3000Overheads5000Net Profit
3 What is a “ Sales Turnover”? The value of sales in a certain period of time.Often is referred to as Sales RevenuesProductUnit PriceQuantity SoldSales Turnover ( Revenues)l$ 1504 Units$ 600
4 Sales Turnover ( Revenues)l Gross ProfitProfits after subtracting the cost of sales from sales turnover.ProductsQuantity SoldUnit PriceSales Turnover ( Revenues)l4 Units$ 150$ 600ProductsQuantity SoldUnit costCost4 Units$ 80$ 320$ 280GROSS PROFIT
5 Net ProfitProfit after subtracting all expenses/ overheads from gross profit.ProductsFixed$ 80CostTotal Cost = $ 130 X 4 Units = $ 520Variable$50Total Sales = $ 150 X 4 Units = $ 600Net ProfitTotal SalesTotal Cost$ 80Total Sales = $ 150 X 4 Units = $ 600Total Cost = $ 130 X 4 Units = $ 520
6 Corporation Tax Tax on a company’s 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 $ 1250.$ 5000 X 25 / 100 = $ 1250
7 What is DIVIDENT? DATA G 11 Ltd consists of 5 shareholders Partner 1: $ 5000Partner 2: $ 5000Partner 3: $ 5000Partner 4: $ 5000Partner 5: $ 5000DATAG 11 Ltd consists of 5 shareholders2012 records showed $ NET PROFITSTotal company capital is $ 1 MShareholders financed the capital on 20% contract.Distribution of DIVIDENTS (shares) on shareholders:
8 The fall of value of fixed assets over time. DepreciationThe 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 Formula Term Gross Profit/Sale Turnover X 100 Gross Profit Margin (%)Net Profit/Sale Turnover X 100Net profit Margin (%)Current AssetsCurrent LiabilityCurrent Ratio (COMPANY LIQUIDITY)Current Assets - StockAsset Test RatioNet ProfitCapital EmployedReturn on capital employed (%)
13 Working capitalThe 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 liabilitiesLoans and debts of the business that will be repaid within one year. (Bank overdraft and creditors.)
16 Balance sheetAn 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’ FundsFinance provided by shareholders - share capital or retained profits. Share capital is from sale of shares. Retained profits are called reserves.
19 Capital EmployedTotal 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. )20042005Sale Revenues200250Net Profit2515Current Liabilities20Current Assets50Capital Employed300