ACCOUNTING FUNDAMENTALS UNIT :5 CHAPTER 29 PAGE 528

Why businesses have to keep accounting records To know its financial position as at the end of the year. E.g.: How much does the business owe? To know the result of its business operation. E.g.: It has made profit or loss. To help it make business decision. To compare the results of the business operation.

Internal & External Users Of Accounting Information Business Managers To measure the performance of the business. To help them take decisions such as new investments. To control the operation of each department & division of the business. To set targets or budgets for the future & compare these with actual performance.

Banks a) To decide whether to lend money. b) Decide whether to allow an increase in overdraft facilities. c) To decide whether to continue an overdraft facility or a loan. Creditors such as suppliers To see if the business is secure & liquid enough to pay off its debts. To decide whether the business is a good credit risk. To decide whether to press for payment.

Customers To decide whether the business is secure. To determine whether they will be assured of future supplies of the goods they are purchasing. To decide whether there will be security of spare parts or service facilities.

Government & tax authorities To calculate how mush tax is due from the business. To determine whether the business is likely to expand or create more jobs. To decide whether the business is in danger of closing down. To confirm that the business is staying within the law in terms of accounting regulations

Investors such as shareholders in the company To assess the value of the business & their investment in it. To decide whether the business is becoming more or less profitable. To determine what share of the profits investors are receiving. To decide whether the business has potential for growth. Compare these details with those from other businesses before making a decision to buy shares. If they are actual investors to decide whether to consider selling all or part of their holding.

Work force To decide whether the business is secure enough to pay wages. To determine whether the business is likely to expand. To determine whether jobs are secure. To find out whether, if profits are rising, a wage increase can be afforded. To find out how the average wage in the business compares with the salaries of directors.

Local community To see if the business is profitable & likely to expand. To determine whether the business is making losses & whether this could lead to closure. To decide whether there is need to get involved.

Limitation Of Published Accounts All stakeholders have a use for the published accounts of the business. The companies will only release the absolute minimum of accounting information as laid down by company law. Company directors obviously wish to avoid sensitive information falling into the hands of competitors or pressure groups.

Are Published Accounts Really Accurate? Stakeholders are often concerned about the accuracy of the published accounts. No company can publish accounts that it knows to be illegally misleading.’ There are many instances when in compiling accounts it is necessary to use judgments & estimations. These judgments can often lead to a difference of opinion between accountants. E.g: Over the precise value of goods (stocks) or the value of other assets.

Window Dressing Presenting the company account in a favourable light –to flatter the business performance.

Common forms of ‘window dressing’ accounts include: a)Selling assets such as building. b) Reducing the amount of depreciation of fixed assets. c) Ignoring the fact that some customers (debtors) who have not paid for goods delivered. d) Giving stock levels a higher value then they are worth. e) Delaying paying bills or incurring expenses until after the accounts have been published. For these reason, published accounts of companies need to viewed with caution by stakeholders. They are useful starting point for investigating the performance of a business.

Financial & Management Accounting Financial Accounting a) Collection of data on daily transactions. b) Preparation of the published report & accounts of a business. c) Information is used by external groups. d) Accountants are bound by the rules & concepts of the accounting profession. e) Accounts prepared once or twice a year. f) Covers past periods of time. Management Accounting a) Preparation of information for managers on any financial aspect of a business, its departments & products. b) Information is only made available to managers. c) Accounting reports prepared as & when required by managers. d) No set rules. e) Cover past time periods, but can also can be concerned with the present or future.

Main business accounts Income statement Balance sheet Cash flow statement TABLE 29.3 page 534

Accounting concepts and conventions Double entry principle Accruals The money measurement principle. Conservation The realisation concept

Income Statement This document is prepared once a year This document is prepared once a year Usually it compares the current years figures with last years results Usually it compares the current years figures with last years results

3 parts of Income statement The Trading Account – This calculates the Gross Profit The Profit and Loss account – This Calculates the amount of Net Profit The Appropriation account :Profit after tax is distributed as dividends and kept as retained profit.

Mr Reading's Burger Bar – Trading Account 2007 Sales (Turnover) 300 Cost of Sales Opening Stock40 Purchases Less Closing Stock Gross Profit ??? How much stock was left over from last year How much stock was left over from this year (unsold stock)

Mr Reading's Burger Bar profit and loss account £OOO Sales (Turnover) Cost of Sales Opening Stock40 30 Purchases Less Closing Stock Gross Profit mbnj Less expenses Wages Insurance 2 3 Rates Rent Telephone 11 Advertising 4 5 Depreciation 5 2 IT 3 4 Light and heat Net Profit Last years closing stock becomes the new year’s opening stock

Gross Profit this is the direct cost of purchasing the goods that were sold during the financial year. Sales turnover It is operating profit minus interest costs and corporation tax. Cost of goods sold Profit left after all deductions including dividends have been made. This is ploughed back into company as a source of finance. Net Profit This records the revenue costs and profit(or loss) of a business over a given period of time. Profit after tax The total value of sales made during the trading period. It is calculated by selling price * quantity sold. Retained profit The share of profit paid to shareholders as return for investing in the company. Dividends It is the sales revenue less cost of sales. Income statement It is gross profit minus overhead expenses.

Gross Profit 170 Less expenses Wages 50 Insurance 2 Rates 11 Rent 30 Telephone 11 Advertising 4 Depreciation 5 IT 3 Light and heat2 118 Net Profit ??? On some profit and loss accounts this is not listed Mr Reading's Burger Bar plc – profit and loss account

Net Profit before tax Tax Profit After Tax D ividends paid Retained profit carried forward The Appropriation Account – shows what happens to the net profit. Sole Traders and Partnerships do not have to do an appropriation account.. Tax paid on profits Total value of dividends paid to share holders Money kept by the business for its own uses

Income statement £OOO Sales (Turnover) Cost of Sales Opening Stock40 30 Purchases Less Closing Stock Gross Profit mbnj Less expenses Wages Insurance 2 3 Rates Rent Telephone 11 Advertising 4 5 Depreciation 5 2 IT 3 4 Light and heat Net Profit Corporation Tax Profit After Tax Divends paid Retained profit carried forward Trading Account Profit and Loss Account Appropriation account

Low quality profit They cannot be easily repeated or sustained High quality profit Profit that can be repeated and sustained.

Balance sheet Fixed assets Current assets Current liabilities Long term liabilities Working capital Share holders funds