Purpose Of Accounting Flashcards
Financial Transactions
Actions by a business that involve money either going into or out of a business e.g. making a sale or paying a bill
HM Revenue & Customs
HM is an abbreviation for Her Majesty’s, and the HMRC is a British government department responsible for the collection of all types of taxes
Accounting
Involves the recording of financial transactions, planned or actual
Record Transactions
- The business owner or a bookkeeper must record all of the money coming into the business (from sales) and all the money going out e.g. expenses
- If a business fails to do this it may find it’s not chasing payments, forgetting to pay bills or even in trouble with HMRC
- If it doesn’t record its transactions correctly it cannot record its financial performance accurately and therefore tax payments may be wrong
Management Of The Business
- A manager is responsible for the planning, monitoring and controlling of the resources for which they are responsible
- A manager with clear understanding of the business’s accounts will be able to make informed decisions and plan for the future
- Manager must ensure there are sufficient funds to pay wages, order new stock, pay bills and meet other demands for cash outflows by balancing this with money coming in from sales
Compliance
- Financial reporting is governed by laws and regulations, this ensures that any financial records give a fair and accurate picture of the business
- Businesses must comply with these laws and regulations in order to ensure that investors and other stakeholders are not misinformed
- Compliance will also help protect against fraud (when company monies are used inappropriately or acquired by the wrong person for personal gain)
Fraud
When an individual acquires company money for personal gain, through illegal actions
Measuring Performance
Define: Gross profit, Net profit, Value owed to business, Value owed by business
- Help to see if a business is making a profit or a loss, to see whether it is owed money or in debt to others
- Key indicators of financial performance
Gross Profit: the amount of profit left after the cost of producing the good or service is deducted from the amount of sales revenue
Net Profit: the smaller amount of profit made after all other expenses are deducted from the gross profit
Value Owed To The Business: this is the amount of money owed to the business from sales that have not yet been paid for
Value Owed By The Business: this is the amount of money the business owes to others for goods or services purchased but not yet paid for
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
Control
- Accounting will control the flow of money into and out of the business by maintaining accurate records and monitoring performance
- This should mean that any unusual activity is spotted, helping to prevent fraud
- It will also track the amount of money the business is owed (trade receivables) from the sale of goods and the amount the business owes (trade payables)
- This will help ensure that the business can meet
its day-to-day expenses - If trade receivables and payables are not carefully controlled, there is a danger that the business may not be able to survive. This will also involve credit control which aims to ensure that all money owed to the business is paid on time
Trade Receivables
Money owed to the business from sales made but not yet paid for
