LOC Flashcards
Purpose of Accounting
Provide the information that is needed for sound decision making
Main purpose of accounting is to prepare financial reports that provide information about a firms performance
Key purposes of accounting
Reorder transactions
Management of the business
Compliance
Measuring performance
Control
Recording transactions
Business owners make a habit of recording their business transactions every day.
It will assist in making informed , efficient precise decisions at any time.
Proper book keeping involves maintains a up to date accounting system, which includes recording business transactions as they occur, as well as keeping important receipts and expenses incurred on behalf of the biz.
If the biz does not record income and outgoings then it can have serious impacts such as the bisness paying incorrect tax to HM revenue bad Customs.
Management of the business planning monitoring and controlling
When following accounting procedure well and recording transactions accurately it can provide a business with vital information that can help manage the business in terms of planning for the future, monitoring current performance and making changes to controlling the performance of the business.
Purpose for a manger of under the accounts of the business allows them to make informed decisions about the direction of the company.
It allows them to plan for staffing levels. Monitoring levels of Stock and control costs such as wages and budgets.
Compliance
Making sure that a company’s financial matters are being handled in accordance with law and regulations.
At any point I. Tome a corporation should be able to provide accurate information about its accounts to it shareholders or to regulating authorities.
Ensure co,pliamce, it’s necessary to have processes in place for recording, verifying and reporting the verifying and reporting of a company’s assets liabilities debts and expenses.
Being compliant means that guy prevents fraud (the inappropriate use of company funds) of as much as physical possible and also that you are meeting the laws and regulations set.
Measuring performance
Without accounting it would be impossible to know whether the business is making a profit if of loss. There are key indicators of financial performance such as
Sales revenue
Gross profit
Net profit
Control
Assisting the prevention of fraud,trade receivables And trade payables
Accounting helps prevent fraud, as transactions will flag as being uncharacteristic or unusual therefore will be investigated.
One key form of control is that it enables the buisness to have a clear picture of its trade receivables and its trade payables
Being able to control these two things means that the business will ensure its survival as it will not owe too much money and it also means a business can manage the payments it is owed to establish good credit control.
Types of income
A businesses income can be split into two types
-Capital
-Revenue
Income
- income is the money a business reveives either through a lump investment or from the sale of its goods or service.
Capital income
Comes from capital invested in the business by investors or owners of the business
It is mot money that comes from any form of production or work
Capital income is usually used to buy assets for the business that are within the business for the medium to long term such as premises or equipment.
Sources of capital income
Loans
Mortgages
Shares
Owners capital
Debentures
Loan
Where money is Guevara to a business usually from a bank and the business repays the loan amount plus interest
Loan terms are agreed to by each party before any money is pid
A loan may be secured by collateral such as mortgages or it may be unsecured in the form of credit cards
Monthly pay,nets must be repaid regardless of whether the business is making a profit or not.
Mortgages
A mortgage is a loan taken out to buy property or land . Most run for 25 years but the term can be shorter or longer
Loan is secured against value of your home until isha paid off.
If you can’t keep up your repayments the lender can reposess (take back) your home and sell it so they get their money back. As business may use a mortgage to buy a premises for their business such as a factory.
Shares
A company can issue its 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.
Owners capital
This is when the owners funds the business through their own personal savings.
Debentures
Medium to long term sources of finance. Large companies use them to secure income. These debt instruments pay an interest rates and are redeemable or repayable on a fixed date.
Company typically makes these scheduled debt interest payments before they pay stock dividends to shareholders
Debentures are advantageous for companies as they carry lower income rates. and longer repayment dates compared to other types of loan and debt instruments
Revenue income
The money that is flowing into the business via the day to day operation of the business
Wherreas capital income is an injection of money into the buisiness.
Revenue income is a by-product of the business performance. How the business recieves revenue income will depend on the sector the business is in.
Expenditure
Money that the business spends
This can come in the form of
Capital expenditure
Revenue expenditure
Capital expenditure
Funds used to acquire or upgrade physical asset such as property, buildings or equipment and also intangibles
Non current asset
Capital expenditure Can be used to purchase non current assets
They are companies long term investments (longer then a year)
Such items can be found on a business statement of financial position and can also be called tangibles (physical items)
Examples of non current assets are
Property
Land
Vehicles
Equipment
Capital expenditure can also fund purchases of intangible assets.
Intangible are things that are not physical.
Examples
- patents
-trademarks
-goodwill
-brand recognition
-intellectual property
Patents
A patent for an invention is granted by the government to the inventor, giving the inventor the right to stop others, for a limited period from making usuing or selling the invention without their permission. A patent is an asset as it prevents other businesses possibly copying their unique seeking point,
Trademarks
Unique symbol or words used to represent a business or its products, once registered, the symbol cannot be used by any other organisation, forever as long as it remains in use and proper paperwork and fees are paid.
Unlike pstebts which are grabbed for. 20 years
Trade markers are valuable to businesses
Goodwill
Sum of money added to a business value based on its customer base, reputation and overall good name. When a business acquires an existing business goodwill is factored in and an amount paid based on the above customer case etc.
Brand recognition
A value are intangible assets. Brand names recognition cannot be touched however it can be deciding factor of whether an individual does business with you. Brand recognition instills trust in the customer and is therefore a valuable asset. People are more willing to shop with brands they trust
Intellectual property
Intellectual property is something that you create using your mind,
For example a story an invention an artistic work or a symbol.
Revenue expenditures
Is money spent by the business on the day to day running of the business.
The amount of money spent will depend on the type of business being run.
An online business may have significant lower revenue expenditure then a manufacturing business with lots of employees and buildings.
Types of revenue expenditure
Inventory
Rent
Rates
Heating and lighting
Water
Insurance
administration
Salaries
Wages
Marketing
Bank charges
Internet paid
Depreciation
