Learning Outcome C Flashcards
What is the purpose of accounting?
- Provide the information that is needed for sound decision making.
- To prepare financial reports that provide information about a firms performance.
What are the 5 purposes of accounting?
Recording transactions, management of the business, compliance, measuring performance, control.
What is the explanation of Recording Transaction?
- Business owner must record all sales (income) and bills (expenses).
What is the explanation of Management Of The Business?
- Planning, monitoring and controlling of resources they are responsible for. – involves coordination of resources e.g. staff and stock.
What is the explanation of Compliance?
- Financial reporting is governed by laws and regulations.
What is the explanation of Measuring Performance?
- Without accounting it would be impossible to know whether the business is making a profit or a loss.
The key indicators of financial performance:
= Sales revenue.
= Gross profit.
= Net profit.
What is the explanation of Control?
- Assisting with the prevention of fraud, trade receivables, and trade payables.
- Accounting allows the business to take control of its finances as it knows the income and outgoings.
What are Trade Receivables in terms of control as a purpose of accounting?
Are amounts billed by a business to customers when it delivers goods or services to them – documented on formal invoices.
What are Trade payables in terms of control as a purpose of accounting?
Amount of money that a business owes to suppliers.
What are benefits of the purpose of accounting : Recording Transactions?
+ Helps to make informed and precise decisions at any time.
+ Helps to remember to pay bills as, failure to chase payments or forgetting to pay bills can mean trouble with HMRC.
What are benefits of the purpose of accounting : Management Of The Business?
+ Ensures there are sufficient funds to pay wages, order new stock, pay bills & and meet other cash outflows by balancing with income from sales.
What are benefits of the purpose of accounting : Compliance?
+ Comply with laws and regulations to ensure shareholders are not misinformed.
+ Being compliant prevents the risk of fraud.
What are benefits of the purpose of accounting : Measuring Performance?
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What are benefits of the purpose of accounting : Control?
+ Enable the business to have a clear picture of its trade receivables and payables.
+ Helps to prevent fraud as transactions will flag as being unusual.
Profit definition:
+ calculation
When total revenue (income) from sales is higher than the total costs to. a business.
Total Revenue - Total Costs.
Loss definition:
Shortfall suffered when total revenue from sales is lower than the total costs to a business.
Gross profit:
+ Calculation
Sales Revenue - Cost Of Goods Sold.
Sales revenue:
+ Calculation
Quantity Sold x Selling Price.
Net profit:
+ Calculation
Gross Profit - Other Expenses.
What are 5 sources of CAPITAL income?
Loans, Mortgages, Shares, Owners Capital, Debentures.
What are loans?
(CAPITAL income)
The transfer of money by one party to another with an agreement to pay it back + interest.
What are mortgages?
(CAPITAL income)
A loan used to buy a property or land.
If pay early = fine.
Most run for 25 years.
Repossession of do not pay regular payments.
What are shares?
(CAPITAL income)
Buying shares gives the buyer part ownership of the business. - unit of ownership in a company.
A company can issue shares to raise capital. Shareholders are owners of the business and usually receive voting rights. A shareholder receives income in the form of dividends if the business is profitable.
What is owners capital?
(CAPITAL income)
The amount the owner of a business has invested in their business using their personal savings. (The proportion of the total assets funded by the owners money).
What are debentures?
(CAPITAL income)
A debenture is an instrument used by a lender, such as a bank, when providing capital (money used to build, run or grow a business) to companies and individuals.
What are the main points about debentures?
= Money used to build, run or grow a business.
= Medium to long term source of finance.
= Large companies use them to source income - Credit worthy? Good reputation? = Small companies not use them as may not have built this.
= Pay an interest rate.
= Redeemable or repayable on a fixed date.
= Company typically makes these scheduled debt interest repayments before they pay stock dividends to shareholders.
= Advantageous to companies as carry lower interest rates and longer repayment dates.
What are 5 sources of REVENUE income?
Sales, Rent Received, Commission, Interest Received, Discount Received.
What are sales?
(REVENUE income)
Income from selling products or services. Can be from cash or credit sales.
What is rent received?
(REVENUE income)
The rent which is received by the owner from the tenant for providing facilities to the tenant for a specific period of time.
What is commission?
(REVENUE income)
When a business or individual sells a product on behalf of another business. If sale is successful then the seller receives commission e.g. YouTubers.
What is interest received?
(REVENUE income)
Money made from savings or investments.
Revenue income = If a business is paid interest for an investment they have made or the balances they have in their account.
What is discount received?
(REVENUE income)
A business pays a reduced price for goods or services. If a business pays a supplier quickly then that business may receive a discount, this in turn has decreased the cost to the business.
What are intangibles?
(Expenditure)
Something you cannot touch, not a physical item.
What are 5 examples of intangibles?
(Expenditure)
- Patent.
- Trademark.
- Goodwill.
- Brand Recognition.
- Intellectual Property.
What are Patents?
(An intangible)
- A patent is the legal protection of an invention, such as a unique feature of a product.
- Allows the business to exploit this in the future by launching an innovative product at a premium selling price.
What are Trademarks?
(An intangible)
- A symbol, logo, brand name or even a colour that sets apart one’s business or goods from those of its competitors.
- Can be a key influence on consumer choice and build strong brand loyalty.
What is Goodwill?
(An intangible)
- Purchasing an existing business, its name and reputation will already be known, it may have an established customer base.
- Increases value of the business and increases the selling price of the business.
- A sum of money is added to the value of the business to reflect the value of this goodwill.
What is Brand Recognition?
(An intangible)
- A feature of a business recognised by customers and distinguishes a business from its competitors.
What is Intellectual Property?
(An intangible)
- Intellectual property is something that you create using your mind. For example, a story, an invention, an artistic work or symbol.
What is capital expenditure?
Funds used to acquire or upgrade physical assets such as property, buildings or equipment and also intangibles.
Capital expenditure is a long term source of income?
TRUE.
What are examples of capital expenditure?
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What is revenue expenditure?
Money spent by the business on the day to day running of the business.
Revenue expenditure is a short term source of income?
TRUE.
What will the amount of money spent by a business depend on?
It depends on the type of the business being run.
