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 Accountants
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 Purchase Order To: Sweet Wholesalers Ltd Manor Road
Newtown
Abdul Sweets Ltd
15 Old Road
Tel:
Fax:
Date: 18/4/10
Order No: 02/136
QUANTITY
DESCRIPTION
TOTAL PRICE
3 $80
2 $50
1 $50
Belgian Chocolates
Crunch Nuts
Juicy Fruits
TOTAL $240
TOTAL $100
TOTAL $50
Deliver ASAP to the above address
TOTAL $390

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 Statement of Account To: Sweet Wholesalers Ltd
Manor Road
Newtown
Manor Road, Newtown
Tel:
Fax:
Account: Abdul Sweets Ltd
Date
Invoice No.
Reference
$ Value
Outstanding
8/9/09
13/9/09
21/9/09
360
421
560
275X
273Z
2715A
240
100
390
Total 240
Total 100
Total 390
Total $630
Issued each month
Payments and credits made
Know money owed for each invoice

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
Sales Revenue
P x Q
Cost of Goods Sold
Cost of producing / buying goods for sale
Gross Profit
 Occurs when Sales Revenue – Cost of Goods Sold

18. Trading Account
Sales Revenue
Cost of Goods Sold
Gross Profit
3,000
1,500
????
25,000
16,000
80,000
?????
20,000
50,000

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 Cost Per Unit Opening Stocks Purchases of Goods
Closing
Cost of Goods Sold $3
500
3,000
200
$9,900 $2
1,000
5,000
????? $5
100
400
300
???? $1
2,000
60,000

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?
Expenses
Salaries
Lighting
Rent

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 Nursery Profit and Loss Account For 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
($000) ($000)
Sales Turnover 1,250 1,300
Cost of Sales
Gross Profit
Operating Expenses
Operating Profit
Interest Payable
Net Profit (Profit before Tax)
Corporation Tax
Profit After Tax
Dividends
Retained Profit

28. Profit and Loss Account for Limited Companies
($000) ($000)
Sales Turnover 1,250 1,300
Cost of Sales
Gross Profit
Operating Expenses
Operating Profit
Interest Payable
Net Profit (Profit before Tax)
Corporation Tax
Profit After Tax
Dividends
Retained Profit

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
Sales Revenue
Tax Paid
Operating Expenses
Cost of Sales
Interest Paid
Dividends
($000)
280 40 30
100 15 25

30. Balance Sheet Balance Sheet Assets Liabilities
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
L-T

31. Balance Sheet Fixed Assets Current 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 Short-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)
Fixed Assets
Land and Buildings
Machinery
1,150 1,040
Current Assets
Stocks
Debtors
Cash
Less
Current Liabilities
Creditors
Bank Overdraft
Working Capital (Net Current Assets)
Net Assets 1,160 1,065
Financed by:
Shareholders’ Funds
Share Capital
Profit and Loss Reserves
Long-Term Liabilities
Long-Term Bank Loan
Capital Employed 1,160 1,065

35. Balance Sheet Terms Working Capital (Net Current Assets) Net 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 Capital Employed
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