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?
???????????????????????????????????????????
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).
