C.1 The Purpose of Accounting Flashcards
1
Q
Give six reasons why a business should keep accounts
A
- Recording transactions - what is coming in, what is being spent, managing debt
- Management of the business - a manager who understands the business accounts will be better able to plan, monitor and control the business
- Compliance - financial reporting is governed by law and regulations to ensure stakeholders and investors get correct information
- Measuring performance - accountants measure how well the business is performing financially
- Provides indicators of financial performance
- Control - it is important to spot unusual activity in a businesses finances. This can prevent fraud and spot errors.
2
Q
Name and explain six indicators of financial performance
A
- Sales revenue - the amount (value) of a product that customers actually buy from a business. Quantity x selling price = revenue
- Profit - the financial return or reward that entrepreneurs aim to achieve to reflect the risk that they take. It is an important source of finance for a business. Revenue - total costs = profit.
- Loss - an excess of expenses over revenues, either for a single business transaction or in reference to the sum of all transactions for an accounting period. Revenue - total costs = loss.
- Current assets - the assets a business owns which are either cash, cash equivalents, or are expected to be turned into cash during the next twelve months.
- Gross profit - the difference between sales revenue and cost of goods sold. Gross profit margin (%) = gross profit (£)/sales revenue (£).
- Net profit - what is left after all the costs of a business have been taken from its sales revenue. Net profit margin = net profit (before tax)/sales x 100.
3
Q
What are trade receivables?
A
A current asset as the money is owed to the business from credit sales made.
4
Q
What are trade payables?
A
A current liability as the money is owed by the business for products purchased on credit.
