1. Business Accounting GCSE Business Studies tutor2u™
Revision Presentations 2004

2. What is Accounting? There is no one agreed definition of accounting
Most commentators agree that accounting involves the
Process of identifying, measuring, recording and communicating financial information to permit informed judgements and decisions by users of the information
Collection & monitoring of financial data providing information about the activities of business

3. Who Uses Accounts?
Shareholders use accounts to monitor a company’s activities and performance and to decide whether to increase, hold or sell their shares
Managers use accounts to measure performance; inform decisions e.g. new investment or plant closure; monitor and control departments; set targets
Banks use accounts to decide whether or not to offer a loan, increase or withdraw an overdraft
Creditors use accounts to see if a firm is an acceptable credit risk or if they need to press for payment
Customers use accounts to decide if a firm is likely to survive into the future and supply after sales service
Government uses accounts to calculate tax payable on sales (VAT), profits (Corporation tax) and employees (national insurance and income tax collected at source (PAYE)
Staff and the wider community use accounts to evaluate if the organisation is stable or likely to close.

4. Roles of the Accounting Function
Administrative:
Record financial transactions
Collect money from sales
Pay suppliers, salaries and wages
Management information:
Prepare regular financial information e.g. monthly management accounts showing sales, costs and profits against budgets, forecasting cash flows, cost investigations
Providing other stakeholders with legal/vital information

5. Main Accounting Records
Sales ledger
Shows how much is owed by customers who have bought on credit
Used to help credit control
Purchase ledger
Shows how much is owed by business to suppliers who have provided goods and services on credit
Cash book and bank statements
Shows all transactions involving cash
E.g. receipts from customers, payments to suppliers, employee wages
Nominal (or “General”) ledger
Used to categorise transactions of a business under headings
E.g. sales of widgets, raw materials, electricity, postage

6. Financial Statements Profit and loss account Balance sheet
Shows how business has traded for a specific period
Balance sheet
Shows the assets and liabilities of a business at a particular time, and how those assets and liabilities have been financed
Cash flow statement
Shows how cash has come into business and what it has been spent on

7. Profit and Loss Account
Shows whether a business has made a NET PROFIT or LOSS over a financial year.
Describes how profit or loss arose – e.g. categorising costs between “cost of sales” and operating costs

8. Gross Profit and Gross Margin
Sales revenue (value of all goods sold) minus cost of making these products (cost of sales)
SALES – COST OF SALES = GROSS PROFIT
Gross margin
A profitability ratio
Calculated as gross profit divided by sales
Expressed as a percentage

9. Cost of Sales
Measures the costs directly associated with making products; e.g.
Raw materials & packaging
Cost of labour working directly on each product
Cost of running machines/equipment

10. Overheads Costs not directly involved in production process
Cost of premises e.g. rent, insurance, repairs
Office costs e.g. stationery, postage, computer maintenance, staff salaries and wages
Sales and marketing costs e.g. salaries of salesmen, advertising
Finance costs e.g. bank charges, interest on bank loans

11. Revenue Expenditure and Capital Expenditure
Money spent on goods and services which have been or will be consumed
E.g. Wages, raw materials
Capital expenditure
Money spent on long term assets which are used over and over again
E.g. Buildings; machinery; computer systems (hardware)

12. Net Profit Calculated as gross profit less overheads
Final profit of business from its normal activities

13. Ways of Improving Gross Profit
Change to cheaper raw material suppliers
Redesign product to use fewer or cheaper materials
Increase selling prices
Offer fewer discounts to customers

14. Ways to Reduce Overheads
Reduce expenditure on promotional activities (e.g. advertising campaigns)
Move to cheaper premises
Combine jobs done by administrative staff to reduce employee numbers
Renegotiate cost of overheads such as legal and accounting fees

15. Balance Sheet
A snap shot of business at a point in time – “balance sheet date”
Shows what business OWNS, IS OWED and OWES
OWNS - Assets such as buildings, stock and cash
IS OWED - Money from debtors
OWES - Money to creditors and bank
PLUS owes money to investors/owners of business (they own profit)

16. Fixed Assets
Assets that provide a benefit for business for more than 12 months
Assets that business intends to keep
Land and buildings
Plant and machinery
Company cars

17. Depreciation
Assets reduce in value over its useful life due to wear and tear and obsolescence
Depreciation is an estimate of how much the value of fixed assets have fallen since they were bought
Reduces original value of an asset by charging an amount every year of its useful life to profit and loss account

18. Current Assets
Stocks – finished goods, work in progress and raw materials (note: also called “inventories”)
Debtors – people who owe business money
Cash –in bank and in cash box

19. Current Liabilities Creditors – money owed by business in short term
Bank overdraft – amounts due within next 12 months

20. Provisions
Where business makes a charge against profits for something expected to happen
E.g. charging against profits a reduction in size of debtors because it is expected that a debtor owing money will fail to pay
This is called a bad debt.
A business might also decide to make a provision for some kind of claim against business – e.g. a legal claim for damages.

21. Capital Amount of long-term money put into business to buy assets
Main forms of capital:
Owners money (share capital)
Retained profits (profit not paid out as dividends)
Long term bank loans

22. Cash flow Statement
Historical statement that shows movements of cash moving in and out of business
Split into two parts:
Sources of funds:
Where cash has come from (e.g. profits, increase in trade credit)
Use of funds
How the cash was used (e.g. purchase of assets, repayments on bank loans)
Different from a cash flow forecast which looks at future movement of cash

23. How Profitable Businesses Can Fail
A business can make a profit but have a negative cash flow.
Without enough cash to pay employees, suppliers, banks and taxes business will go bankrupt.
A business makes a profit when sales exceed costs.
Positive cash flow arises when payments from customers exceed payments to suppliers and employees. Cash may not be due from customers until next month, but bills and employees may have to be paid today.
This situation can give rise to negative cash flow, even though value of sales is greater than costs
Poor cash flow is one of main reasons why new businesses fail.

24. Accounting Statements Published by a Limited Company
Companies Act requires limited companies to produce several accounting statements
Published in the Annual Report and Accounts
Profit and loss account
Balance sheet
Cash flow statement
Note: sole traders and partnerships are not required to publish their accounting information publicly like companies. However, they will still need to produce accounts to show to the banks and to calculate tax payments