Outcome C Flashcards
What is the purpose of accounting
Is to provide the info that is needed for sound decision making
(The main purpose of accounting) is to prepare financial reports that provide information about a firm’s performance
The purpose of accounting (5)
Record transactions
Management of the business
Compliance
Measuring performance
Control
Recording transactions
It is important that business owners make a habit of recording their business transactions everyday. It will assist in making informed, efficient and processed decisions at any time.
Proper bookkeeping involves maintaining up to date accounting systems, which includes recording business transactions as they occur, as well as keeping important receipts and expenses incurred on behalf of the business
If the business does not record income and outgoings then it can have serious impacts such as the business paying incorrect taxes to HM revenue and customs
Management of the business
The purpose for a manager of understanding the accounts of the business allows them to make informed decisions about the direction of the company
It can allow them to plan for staffing levels, monitor levels of stock and control costs such as wages and budgets
Compliance
(In terms of accounting ) compliance means making sure that a company’s financial matters are being handled in accordance with laws and regulations
At any point on time, a corporation should be able to provide accurate info about its accounts to its shareholders or to regulating authorities
To ensure compliance, it’s necessary to have processes in place for recording, verifying and reporting the value of a company’s assets, liabilities, debts, and expenses
Being compliant means that you prevent fraud of as much as physically possible also that you are meeting laws and regulations set
Measuring performance - there are key indicators of financial performance such as
Sales revenue
Gross profit
Net profit
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 therefore helping prevent fraud as transactions will flag as being uncharacteristic or unusual and therefore will be investigated
One key form of control is that it enables the business to have a clear picture of its trade receivables (money owed to the business) and its trade payables (money the business owes). Being able to control these two things means that the business will ensure it’s survival as it will not owe too much money and it can also manage the payments it is owed to establish good credit control
What is income
is money a business receives either through a lump sum investment or from the sale of its goods or service
A businesses income can be split into two types:
Capital
Revenue
Capital income
Is income that comes from capital invested in the business by investors/owners of the business.
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
Name the 5 sources of capital income
Loans
Mortgages
Shares
Owners capital
Debentures
Loan
Is when money is given 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 paid
Monthly payments must be repaid regardless of whether the business is making a profit or not
A loan may be secured by collateral such as a mortgage or it may be unsecured in form of credit cards
Mortgages
Is a loan taken out to buy property or land. Most run for 25 years but the term can be shorter or longer. The loan is “secured” against the value of your home until it’s paid off. If you can’t keep up with your repayments the lender can repossess your home and sell it so they get their money back.
Shares
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
Owners capital
This is when the owner funds the business through their personal savings
Debentures
Medium to long term sources of finance. Large companies use them to secure income. These debt instruments pay an interest rate and are redeemable or repayable on a fixed date
A company typically makes these scheduled debt interest payments before they pay stock dividends to shareholders
Debentures are advantageous for companies since they carry lower interest rates and longer repayment date’s compared to other types of loans and debt instruments
Revenue income
Is the money that is flowing into the business via the day to day operation of the business
Whereas capital income is an injection of money into the business. Revenue income is a by-product of the business performance. How the business receives revenue income will depend on the sector the business is in
Name the 5 sources of revenue income
Sales
Rent received
Commission
Interest received
Discount received
Sales
These can either be cash or credit sales and it is money made from the sales of goods or services
Rent received
A property mogul who owns residential or commercial property would receive revenue income in the form of rent as they charge others to use the properties
Commission
When a business or individual sells a product on behalf of another business. If the sale is successful then the seller receives a commission,
Interest received
Money made from savings or investments. If a business is paid interest for an investment they have made or for positive balances they have in their account then this is classed as revenue income.
Discount received
This is when 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 had reduced the cost to the business.
What is expenditure
Is the money that the business spends. This can come in the form of:
Capital expenditure
Revenue expenditure
Capital expenditure
Is funds used to acquire or upgrade physical assets such as property, buildings or equipment and also intangibles
Non current assets
Capital expenditure can be used to purchase non current assets. Non current assets are a companies long term investments. Such items can be found on a business statement of financial positions and can also he called tangibles (physical items)
Examples of non current assets
Property
Land
Vehicles
Equipment
Intangibles
Capital expenditure can also fund purchases of intangible assets. Intangibles are things that are not physical
Examples of intangibles
Patents
Trademarks
Goodwill
Brand recognition
Intellectual property
Patents
A patent for an invention is granted by the gov to the inventor, giving the inventor the right to stop others, for a limited period, from making, using or selling the invention without their permission. a patent is an asset as it prevents other businesses possibly copying their unique selling point
Trademarks
A unique symbols or word(s) used to represent a business or its products. Once registered, that same symbol or series of words cannot be used by any other organisation as long as it remains in use and proper paperwork and fees are paid. Unlike, patents, which are granted for a period of 20 years.
Goodwill
Is a sum of money added to a businesses value based on its customer base, reputation and overall good name. When a business acquired an existing business goodwill is factored in and an amount paid based on the above customer base etc
Brand recognition
A valuable intangible asset. Brand recognition cannot be touched how it can be a deciding factor of whether an individual does business with you. Brand recognition installs trust in the customer and is therefore a valuable asset. People are more willing to shop with brands they trust
Intellectual property
Is something you create using your mind
Revenue expenditure
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 significantly lower revenue expenditure than a manufacturing business with lots of employees and buildings
Types of revenue expenditures
Inventory
Rent
Rates
Heating n lighting
Water
Insurance
Administration
Salaries
Wages
Marketing
Bank charges
Interest paid
Depreciation
