Business Finance: C1-C3 Flashcards
C1- Accounting
The recording of financial transactions, planned or actual, and the use of these figures to produce financial information
Reasons why accounting is important to business success: (5)
- Recording Transactions
- Management of business
- Compliance
- Measuring Performance
- Control
Recording Transactions
All transactions should be recorded accurately to:
- Meet legal requirements
- Aid the smooth running of the business
- Accurately produce end of year and interim accounts
Transactions can be:
Internal - expense claims by employees, wages
External - paying a supplier
Expenditure - buying an asset
Income - cash sales
The business owner/ accountant must record all of the money coming into the business (sales) and money going out (expenses)
If a business fails to do this, it may:
- Find itself not chasing payments
- Forget to pay bills
- Be in trouble with HM Revenue and Customs (HMRC)
If a business does not record its transactions correctly - it cannot report its financial performance accurately - tax payments may be wrong
Financial transactions - money going into/ out of a business
HMRC - responsible for the collection of all types of taxes
Management of business
A manager is responsible for the planning, monitoring and controlling of their resources
A manager who understands the business’ accounts:
- will be better able to make informed decisions and plan for the future
- involves careful coordination of resources including staff, materials, stock and money
- must ensure there are sufficient funds to pay wages, order new stock, pay bills, and meet other demands by balancing cash outflows with money coming in from sales.
Compliance
Governed by laws and regulations- to ensure that any financial records give a fair and accurate picture of the business
- Businesses must comply with these laws and regulations to ensure that investors and other stakeholders are not misinformed
Compliance will also help protect against fraud
Measuring Performance
- To recognise if the business was making a profit/ loss
- Helps businesses realise if money was owed to them or if they were in debt to others
Key indicators of financial performance:
• Gross profit - the amount of profit left after the cost of producing the goods/ services is deducted from the sales revenue
• Net profit - the smaller amount of profit made after all other expenses are deducted from the gross profit
• Value owed to the business - money owed by customers for sales they have not yet paid for
• Value owed by the business - money the business owes to suppliers for goods/ services purchased but not yet paid for
Target profit vs actual profit
- Inter/ intra firm comparisons - inter = external, intra = internal
- Ratio analysis
- Benchmarking
Control
Controls the flow of money, into/ out of the business
This means any unusual activity is spotted - helps protect against fraud - ensures the business can meet its day to day expenses
Trade receivables - money owed to the business from sales made but not yet paid for
Trade payables - money the business owes from supplies purchased but not yet paid for
C2 - Capital income
Long term (one-off) sources of income used to fund the purchase of non-current assets I.e items of value that a business owns and will stay in the business for over a year e.g premises, machinery, vehicles
Revenue income
Income that comes into a business from its trading activities (regular income) e.g sales of goods/ services
Types of capital income (5)
- Loans
- Mortgages
- Shares
- Owners Capital
- Debentures
Loans
~ A lump sum into the business for a specific purpose E.g to buy assets
~ To be repaid over a set period of time E.g 5 years with interest
~ Secured against the asset
Advantages:
- Can help you in emergencies
Disadvantages:
- Interest is charged
Mortgages
~ A lump sum into the business for a specific purpose E.g to buy premises
~ Normally for a larger amount of finance and a longer period of time E.g 25 years
~ Secured against the asset
Advantages:
- Spreads the cost over a long period of time
Disadvantages:
- Could add interest
Shares
~ Investments (by individuals/ groups) into companies in return for a part ownership of the company
~ Shareholders want to be rewarded by dividends I.e a share of the profit and by an increase in share price
~ Shareholders have a voting right
Advantages:
- Receive dividends either as income or reinvest to buy more shares
Disadvantages:
- Can lose money in shares
Owner’s Capital
~ Money invested by the owner of the business E.g from personal savings/ loans
Advantages:
- Owner has control
- Does not need to be repaid
- Can remain private
Disadvantages:
- Not all owners have additional capital to call on
- Amount available may be limited
Debentures
~ A lump sum is paid into the business at a set point in time and must be repaid as a lump sum at a prearranged date in the future
~ Interest is paid throughout the period of the debenture
~ Normally secured against an asset
Advantages:
- Could be a way to grow the business over a long period of time
- Interest payments are fixed
Disadvantages:
- Interest is charged
- No control over the decision
- No flexibility
