Outcome C

Question 1

What is the purpose of accounting

Answer 1

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

Question 2

The purpose of accounting (5)

Answer 2

Record transactions
Management of the business
Compliance
Measuring performance
Control

Question 3

Recording transactions

Answer 3

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

Question 4

Management of the business

Answer 4

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

Question 5

Compliance

Answer 5

(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

Question 6

Measuring performance - there are key indicators of financial performance such as

Answer 6

Sales revenue
Gross profit
Net profit

Question 7

Control

Answer 7

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

Question 8

What is income

Answer 8

is money a business receives either through a lump sum investment or from the sale of its goods or service

Question 9

A businesses income can be split into two types:

Answer 9

Capital
Revenue

Question 10

Capital income

Answer 10

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

Question 11

Name the 5 sources of capital income

Answer 11

Loans
Mortgages
Shares
Owners capital
Debentures

Question 12

Loan

Answer 12

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

Question 13

Mortgages

Answer 13

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.

Question 14

Shares

Answer 14

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

Question 15

Owners capital

Answer 15

This is when the owner funds the business through their personal savings

Question 16

Debentures

Answer 16

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

Question 17

Revenue income

Answer 17

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

Question 18

Name the 5 sources of revenue income

Answer 18

Sales
Rent received
Commission
Interest received
Discount received

Question 19

Sales

Answer 19

These can either be cash or credit sales and it is money made from the sales of goods or services

Question 20

Rent received

Answer 20

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

Question 21

Commission

Answer 21

When a business or individual sells a product on behalf of another business. If the sale is successful then the seller receives a commission,

Question 22

Interest received

Answer 22

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.

Question 23

Discount received

Answer 23

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.

Question 24

What is expenditure

Answer 24

Is the money that the business spends. This can come in the form of:
Capital expenditure
Revenue expenditure

Question 25

Capital expenditure

Answer 25

Is funds used to acquire or upgrade physical assets such as property, buildings or equipment and also intangibles

Question 26

Non current assets

Answer 26

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)

Question 27

Examples of non current assets

Answer 27

Property
Land
Vehicles
Equipment

Question 28

Intangibles

Answer 28

Capital expenditure can also fund purchases of intangible assets. Intangibles are things that are not physical

Question 29

Examples of intangibles

Answer 29

Patents
Trademarks
Goodwill
Brand recognition
Intellectual property

Question 30

Patents

Answer 30

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

Question 31

Trademarks

Answer 31

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.

Question 32

Goodwill

Answer 32

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

Question 33

Brand recognition

Answer 33

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

Question 34

Intellectual property

Answer 34

Is something you create using your mind

Question 35

Revenue expenditure

Answer 35

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

Question 36

Types of revenue expenditures

Answer 36

Inventory
Rent
Rates
Heating n lighting
Water
Insurance
Administration
Salaries
Wages
Marketing
Bank charges
Interest paid
Depreciation