Learning Outcome C: Understand the purpose of accounting Flashcards
It is impossible to truly understand how a business operates without some knowledge of the __________ process
accounting
Anyone who wants to understand how well a business is performing - such as the owner, an employee or a potential investor - is likely to turn where?
Straight to its accounts
However good a business idea may be, if the owner doesn’t keep a careful eye on what means the business is almost certain to fail?
Its accounts
Accounting involves the recording of _________ ____________
financial transactions
Financial transactions
Actions by a business that involve money either going into or out of a business - for example, making a sale or paying a bill
HM Revenue & Customs (HMRC)
HM is an abbreviation for Her (or His) Majesty’s, and the HMRC is a British government department responsible for the collection of all types of taxes
True/False: Accounting involves only past financial transactions
False, it can involve planned ones too
Accounting involves the recording of financial transactions, planned or actual, and the use of these figures to produce what?
Financial information
Keeping business records accurate and up to date is important for the ______ _______ of a business
smooth running
Who must record all of the money coming into a business (from sales) and all of the money going out, such as expenses?
The business owner or a bookkeeper
What can happen if a business fails to record its income and outgoings?
It may find itself not chasing payments, forgetting to pay bills or, even more seriously, in trouble with HMRC
If a business doesn’t record its transactions correctly, what could happen?
It cannot report its financial performance accurately and therefore tax payments may be wrong
What is a manager of a business responsible for?
The planning, monitoring and controlling of the resources for which they are responsible.
What is the benefit of having a manager who clearly understands a business’s accounts?
They will be better able to make informed decisions and plan for the future
Management of a business involves careful coordination of resources including… (name 2)
staff, materials, stock, money, etc.
What must a business manager ensure there are sufficient funds to do?
Any from pay wages, order new stock, pay bills and meet other demands for cash outflows by balancing this with the money coming in from sales
Financial reporting is governed by…
laws and regulations
Why is financial reporting governed by laws and regulations?
To ensure that any financial records give a fair and accurate picture of the business
Why is it important that businesses comply with financial reporting laws and regulations?
To avoid getting in trouble with HMRC as well as ensure that investors and other stakeholders are not misinformed. Compliance will also help protect against fraud
True/False: Compliance to financial reporting laws and regulations will help protect against fraud
True
Fraud
When an individual acquires company money for personal gain, through illegal actions
Profit
Surplus achieved when total revenue (income) from sales is higher than the total costs of a business
Loss
Shortfall suffered when total revenue from sales is lower than the total costs of a business
Gross profit
Sales revenue minus cost of goods sold (the cost of the actual materials used to produce the quantity of goods sold)
Sales revenue
Quantity sold multiplied by the selling price
Net profit
Gross profit minus other expenses, for example, rent and advertising
Without financial records it would be impossible to know if a business was making a ______ or a ____
profit or a loss
Without financial records it would be impossible to know whether or not a business was owed money or…
was in debt to others
Give 3 examples of KPIs of financial performance
Any 3 from gross profit, net profit, value owed to the business and value owed by the business
What does accounting control?
The flow of money into and out of a business
How does accounting control the flow of money into and out of a business?
By maintaining accurate records and monitoring performance
What does monitoring performance mean about unusual activity in accounting?
Any unusual activity is spotted, helping to prevent fraud
Trade receivales
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
What does keeping track of trade receivables and trade payables ensure for a business?
Ensures the business can meet its day-to-day expenses
If trade receivables and payables are not carefully controlled, there is danger that…
the business may not be able to survive
What does credit control aim to ensure?
That all money owed to a business is paid on time
Name the 2 categories of income
Capital income and revenue income
Fixed assets
Items of value owned by a business that are likely to stay in the business for more than one year - for example, machinery. Also known as non-current assets
What are fixed assets also known as?
Non-current assets
Capital income
Money invested by the owners or other investors that is used to set up a business or buy additional equipment
What does capital income tend to be used for?
To buy things that will stay in the business for a medium-to-long period of time - for example, premises, vehicles or equipment
Capital income tends to be used to buy things that will stay in the business for a medium-to-long period of time - for example, premises, vehicles or equipment. What are these called?
Fixed assets
When setting up a business what may capital income be used for?
To buy opening stock, premises, vehicles, equipment, etc.
As a business develops, what should stock be paid for by?
Sales income
What are the sources of capital income available to business owners influenced by?
The type of business
A loan is an amount of money lent to the business or business owner(s) from…
a bank or other financial institution
A loan is a ____ ___ that then has to be paid back at a set amount per month over the period of the loan
lump sum
A loan in a lump sum that then has to be paid back how?
At a set amount per month over the period of the loan
How long is the typical period of a loan
Five years
True/False: Longer-term loans over 5 years can be agreed
True
What is added in addition to the repayment of a loan?
A monthly interest repayment
Interest on a loan is…
the amount of money the bank is charging for the loan as a percentage of the amount borrowed
Interest rates can be _____ or…
fixed, or it may vary with changes in the economy
What makes a loan a relatively expensive source of capital income?
The interest payable on top of the loan
True/False: Monthly loan payments have to be made even if the business is not making a profit
True
Banks are not guaranteed to lend money to a business, so the business would have to…
justify how the money borrowed would be spent and, more importantly, how they can afford to repay it
True/False: Often bank loans have to be secured against an asset
True
Why do bank loans often have to be secured against an asset?
To convince the bank that the risk being taken is not too geat
Give an example of an asset in which a bank loan may be secured against
Any from the entrepreneur’s home, the company’s vehicles, etc.
If a loan has an asset secured against it, what will happen if a business fails to meet payments?
The bank can claim the asset
Asset
Any item of value owned by an individual or firm
What’s the difference between a mortgage and a bank loan?
Mortgages tend to be for a larger sum of money and over a longer period of time
What period of time to mortgages tend to be over?
Typically 25 years
True/False: Mortgages are always secured on an asset
True
Mortgages are always secured on an asset, normally…
property
Individuals will take out a ________ to buy a house
mortgage
What may businesses take out to buy their premises, for example a factory, retail store or warehouse?
A mortgage
When does a business become a company?
When it is registered with Companies House and issues shares to its shareholders
True/False: Shareholders are owners of a business and all contribute towards the capital income
True
Shareholders normally receive a ______ right
voting
The more shares a shareholder owns, the greater…
their ability to influence decision making
How are shareholders rewarded for their investment?
By the payment of a dividend; this is a share of the profits
Dividend
Share of a business’ profits
Owner’s capital
Money invested in a business from the owner’s personal savings
Sole trader
A person who owns a business on their own
How does a sole trader have to find their capital income?
From their own sources or personal loans
What do sole traders often do with their personal savings?
Invest them into the business
What may a sole trader use to secure a loan?
Personal assets such as their house
Why are investments of owner’s capital a big risk for sole traders?
They are ultimately responsible for the debts of the business
Being a sole trader can limit the amount of money available and can therefore…
restrict the size of the business
What’s the benefit of having a successful business as a sole trader?
You can keep all of the profits for yourself
Partnership
When two or more people join together to set up a business as partners
In a partnership, who is expected to contribute towards the capital income?
Each partner
In a partnership, each partner would be expected to contribute towards the capital income, so increasing the…
potential amount of money available
Give 2 examples of things that partners share in business
Decision making and profit, etc.
In most partnerships, any loans taken out are secured by…
the partners’ own assets
Why is a partnership a high-risk option in business?
Any loans taken out are usually secured by the partners’ own assets
True/False: Debentures are short-term sources of capital income
False, they are medium- to long-term
Large companies often use debentures to secure what?
Income
True/False: Interest on a debenture is normally at a fixed rate
Tre
How is debenture repaid?
As a lump sum, normally on a pre-agreed date
True/False: Debentures can be secured against an asset
True
Debentures are a form of what?
Loan capital
Capital income
Money invested in the business to set it up or later buy additional assets; it is a long-term investment
Revenue income
Money that comes into the business from performing its day-to-day- function - selling goods or providing a service
Money earned from selling goods or providing a service is an example of which type of income?
Revenue income
What does the nature of revenue income depend on?
The activities that the business does to bring in money
Sales turnover
Money coming in from the sales of goods or services
What is sales turnover determined by?
The prices charged and the number of customers
What are the two types of sales?
Cash sales and credit sales
What is meant by cash sales?
The customer pays there and then
What is meant by credit sales?
The customer buys but then pays at a later date
Commission
A fee paid to a salesperson in exchange for services in facilitating or completing a sales transaction. Commission could be a flat fee or a percentage of the revenue, gross margin or profit generated by the sale. It could also be charged by brokers to assist in the sake of security, properties, etc.
Give 2 examples of how commission could be determined
Any 2 from a flat fee, a percentage of the revenue, gross margin or profit generated by the sale.
Commission could be charged by brokers to…
assist in the sale of security, properties, etc.
A business that owns property and charges others for use of all or part of that property will receive what as their main source of income?
Rent
If a business owns a house and rents out three rooms, what will it receive?
Rent frm each of these renters
A business may sell products or services as an agent of another business. They sell another business’ products on their behalf and, for each sale they make, they get paid a percentage on that sale. What is this percentage called?
Commission
Interest received
Money earned on savings or lending
If a business has a positive bank balance what will they receive on this?
Interest
If a business has a positive bank balance it will receive ________ on this. This acts as revenue coming into the business.
interest
A business may lend money to another person or business. What will be charged to the lender?
Interest
A business may lend money to another person or business. Interest will be charged to the lender and the business lending the money will receive interest as a form of what?
Revenue
Discount received
When a business is given a percentage off a sale, normally in return for quick payment or a bulk order. This reduces the costs to the business
Expenditure
Money spent by a business
Name the two types of expenditure
Capital expenditure and revenue expenditure
What is capital expenditure used to buy?
Capital items
Capital items
Assets bought from capital expenditure such as machinery and vehicles that will stay in a business for more than a year
Capital items are current/non-current assets
non-current assets
Capital items are tangible/intangible assets
intangible
Statement of financial position
A financial document that shows the net worth of a business by balancing its assets against its liabilities. It is often called a balance sheet
Non-current assets
Items owned by a business that will remain in the business for a reasonable period of time
What is a statement of financial position often also called?
Balance sheet
True/False: Non-current assets are shown on a business’s statement of financial position/balance sheet
True
Give an example of a non-current asset
Any from land, premises, machinery, equipment, vehicles, fixtures, fittings, etc.
What are non-current assets sometimes referred to as, and why?
‘Tangible assets’, because they can be touched
Most fixed assets increase/lose their value over time
lose
Most fixed assets lose value over time and for this reason they are what?
Depreciated
Depreciated
Each year their value on the balance sheet is reduced in order to give a fair value of the asset
Intangible asset
Something owned by the business that cannot be touched but adds value to the business
Goodwill
When you buy an existing business, its name and reputation will already be known, and it may already have an established customer base or set of clients
What is the benefit of having a business with goodwill?
Its name and reputation will already be known and it may already have an established customer base or set of clients - increasing thex business’ value and selling price
What is added to the value of a business to reflect the value of its goodwill?
A sum of money
What’s the limitation of adding a sum of money to the value of a business to reflect its goodwill?
It is difficult to place a figure on
Patent
The legal protection of an invention, such as a unique feature of a product or a new process
Wy may an entrepreneur or business patent their idea?
To stop others from copying the idea
What does having a patent allow a business to do?
Exploit this in the future by launching an innovative product at a premium selling price
True/False: It is easy to know how much value to place on a patent
False, it is difficult to know how much value to place on it
Trademark
A symbol, logo, brand name, words or even a colour that sets apart one business’ goods or services from those of its competitors
Trademarks can be a key influence on ________ ______ and build a strong _____ _______
consumer choice, brand loyalty
A trademark is recored as a tangible/an intangible asset
an intangible asset
Brand name
A feature of a business that is recognised by customers and distinguishes the business from competitors
What will customers link a brand name with?
Expectations based on previous experiences with the brand
It is sometimes said that a brand name is a promise of…
what to expect
Revenue expenditure
Spending on items on a day-to-day or regular basis
What are the expenses incurred by a business that are shown on the profit and loss account?
Revenue expenditure
True/False: Revenue expenditure is fixed between all businesses
False, the types of costs incurred vary from business to business
Most businesses providing a good or service will require some sort of _________, whether it is raw materials, finished goods to sell on or supplies to provide the service
inventory
When a business is first set up, it is likely to have to buy inventory with cash. Why?
It will not have built a reputation as being trustworthy and able to pay
A business becomes more established, it may be able to buy inventory on ______
credit
Receiving an inventory and paying 30 days later is an example of buying an inventory on what?
Credit
Why may bigger and more established businesses also be able to drive down the cost of inventory?
They will buy in larger quantities
Give an example of costs other than the goods themselves that are related to inventory
Any from storage costs and insurance
Rent
The cost of using premises not owned by the business. These are regular payments, usually monthly, for the use of premises
Rent payments are usually how regular?
Monthly
In the same way as private residents pay council tax to the local authority, businesses pay what?
Non-domestic rates
Non-domestic rates
This is a sum of money paid to the local council to go towards services such as street lights and refuse collection
True/False: Non-domestic rates are a set amount
False, they are not
Who are non-domestic rates calculated by?
The council
What are non-domestic rates calculated based on?
The size and location of the premises and the nature of the business
How regularly will a business receive bills for services such as gas and electricity?
Often quarterly (every 4 months)
True/False: Water can be a fixed rate or based upon usage
True
How can water bills be based upon usage?
If a water meter is fitted
A business is legally required to take out a number of types of _________ to protect itself from the possibility of serious losses
insurance
Name 2 types of insurance that a business is legally required to take out
Any 2 from buildings insurance, contents insurance, public liability insurance and employers’ liability insurance
Buildings insurance
To protect the physical building from damage that may be caused by events such as fire
Contents insurance
Protects what is inside the building in terms of machinery, fixtures and fittings and stock from damage that may be caused by events such as flooding
Public liability insurance
To protect people within the building who may be harmed or injured from an event such as an accident
Employers’ liability insurance
This means that if the employee is injured at work, the business is protected against any claims for compensation or any legal costs incurred
What does administration refer to?
The paperwork that goes on within a business either internally between employees or externally with suppliers and customers
Give 2 examples of items included in administrative costs
Any 2 from postage, printing and stationary
Business cards, headed paper and order books are examples of which types of costs?
Administrative costs
What type of cost are telephone charges classed as?
Administrative costs
Why are telephone charges slightly unusual administrative costs from an accounting point of view?
For a landline, these costs are split into two: the line rental cost, which is paid quarterly in advance, and then the call charges, which are paid quarterly after use
Salary
An annual figure paid to an employee divided into equal monthly payments
A trainee accountant may have a salary of £18,000 per year. What would their gross pay per month be?
£1,500
A trainee accountant may have a salary of £18,000 per year, meaning their gross pay per month would be £1.5k. What would they have to pay before taking home the rest of their pay?
National Insurance, tax and maybe pension contributions
True/False: If someone’s salary is £18,000, the business’ outgoings are £18,000
False, the amount the business have to pay is higher. The business also has to pay employers’ National Insurance
How much is employer’s National Insurance?
12.8%
Wages
An hourly rate paid to an employee, meaning there is a direct link between the number of hours worked and the amount of money paid
What’s the benefit of paying a wage rather than a salary?
Allows greater flexibility for both the employer and the employee
What’s the main drawback of paying a wage rather than a salary?
It creates greater uncertainty
Give 3 examples of marketing costs
Any from advertisements, promotional literature, promotional events, point of sale materials and so on
True/False: Personal banking is generally free
True
True/False: Banks charge businesses for each transaction that takes place
True
Why may banks offer free banking to businesses for the first year?
As a marketing technique
If a business has a bank loan or mortgage, what will be charged on this?
Interest
Why may banks offer big businesses preferential interest rates?
If they are confident that the money will be paid back and if they want to keep that particular business as a loyal customer
True/False: Assets increase in value over time
False, they lose value over time
Accountants use ____________ to spread out the cost of an asset over its useful life
depreciation
Depreciation is a paper exercise to…
match the cost of an asset against the time it is used within a business
True/False: A machine purchased at a cost of £50,000 that is expected to last five years would be shown as a one-off expense at the time of purchase in the accounts
False, it would be shown as an expense of £10,000 per year
Straight-line depreciation
An asset is depreciated by a set amount each year
Reducing balance depreciation
An asset is depreciated by a set percentage of its remaining value each year
Why are reductions offered to customers an expense to a business?
It reduces the amount of cash flowing into the business
Give 2 reasons why discounts may be allowed in business
Any 2 from to attract customers, for bulk purchases and to gain a competitive advantage
