Section C (BUSINESS FINANCE) Flashcards
To understand the purpose of accounting
What does accounting involve?
Accounting involves the recording of financial transactions and the use of these figures to produce financial information.
What is fraud?
When an individual acquires company money for personal gain, through illegal actions.
What is profit?
Surplus achieved when total revenue (income) from sales is higher than the total costs of a business.
What is loss?
Shortfall suffered when total revenue from sales is lower than the Toal costs of a business.
What is GROSS PROFIT and what’s the equation for it?
WHAT?
Is the amount of profit left over after the cost of producing the good or service is deducted from the amount of sales revenue.
EQUATION:
Sales revenue - Costs of goods
(Cost of goods is the cost of the actual materials used to produce the quantity of goods sold)
What is NET PROFIT and what’s the equation for it?
WHAT?
Is the smaller amount of profit made after all other expenses are deducted from the gross profit.
EQUATION:
Gross profit - Other expenses (E.G. Rent & advertising)
What is the equation for SALES REVENUE?
EQUATION:
Quantity sold X Selling price
What does ‘value owed to the business’ mean?
It is the amount of money owed to the business from sales that have not yet been paid for.
What does ‘value owned by the business’ mean?
It is the amount of money the business owes to others for goods or services purchased but is not yet paid for.
What are TRADE PAYABLES / CURRENT LIABILITIES?
Money the business owes from supplies purchased but not yet paid for.
What are TRADE RECEIVABLES / CURRENT ASSETS?
Money owed to the business from sales made but not yet paid for.
What is ‘income’?
Money coming into the business.
What are the 2 types of income?
Capital Income & Revenue Income.
Example scenarios of Capital Income?
Money invested to set up a business or buy additional equipment.
Used to buy medium to long term fixed assets.
Could also be used to buy opening stock for a new business.
Sources of capital income available are influenced by the type of business.
Long-term investment.
Examples of capital income
Loans, Mortgages, Shares, Owner’s Capital, Debentures.
Example scenarios of Revenue Income?
Money coming into the business performing day-to-day functions - selling goods or services.
Nature of the revenue income depends on the activities the business does to bring money in.
Examples of revenue income
Sales, Rent Received, Commission Received, Interest Received, Discount Received.
What is the definition for ‘fixed assets’?
Items of value owned by a business that are likely to stay in the business for more than one year - e.g. machinery. Also known as NON-CURRENT ASSETS.
What are 5 types of Revenue Income?
- Rent Received
- Sales
- Commission Received
- Interest Received
- Discount received
Description of Rent Received
Rent received is money paid by tenants for accommodation and services provided in the course of the business at the premises.
Rent comes under ‘indirect income’ because obtaining rent doesn’t require active efforts on the part of the owner (its automatic).
Rent receivable account is considered a current asset, since rent is typically due within the next year. However, a landlord could offset this if there’s a probability that the tenant wont pay.
Landlords pay income tax on any rental income. At the end of the year, they must declare the total net income from all of their income sources.
Description of Sales
Sales Revenue is a company’s income generated through the sales of goods or services.
Revenue is calculated differently than income. While revenue is calculated by multiplying the total number of goods and services sold by their prices, income is calculated by subtracting expenses, costs and taxes from total revenue.
Description of Commission Received
Commission is the fee received by an individual for performing a task or delivering a service.
An employee receives a commission income in exchange for making a sale. It can be common for employees to earn additional income on top of their base wage or base salary. It is also common for some employees to work solely on commission.
Description of Interest Received
Interest Received is money earned through loaning money or money received from depositing or investing. Companies who charge interest on loans consider the interest revenue as a major source of income, which should be reported at the top of the income statement.
As long as it can be reasonably expected to be paid within a year, interest received is generally recorded as a current asset.
Description of Discount Received
It refers to the reduction in cost that a buyer receives from a seller. The buyer views this discount as a reduction in the cost of purchases and records its as such in their books. So, discounts received are generally recorded in the company’s income statement as other income.
Discount received is an income of the buyer.
What are 5 types of Capital Income?
- Mortgages
- Loans
- Shares
- Debentures
- Owner’s Capital
Description of Mortgages
A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed and interest.
A kind of loan you can use to help you buy property. The average mortgage lasts 25 years during which you’ll make monthly repayments. it’s secured against your home, which means you may lose your home if you can’t keep up with the repayments.
An interest rate is the amount of interest you’ll pay on the money you borrow to buy a property. The rates shown as a percentage, e.g. 4% per month.
A mortgage is a liability - not an asset - as liabilities are anything you owe money on e.g. a car loan, home mortgage etc.
A mortgage is a secured loan.
Description of loans
A loan is when money is given to another party in exchange for repayment of the loan principle amount and interest. Lenders will consider a prospective borrowers income, credit score and debt levels before deciding to offer them a loan.
Business loans can be used to help fund the purchase of premises for your business, to help you buy stock or to cover ongoing running costs. You might need a long-term business loan to finance a start-up company if you do not expect to bring in any revenue for your first few months.
A secured loan is money borrowed, or ‘secured’, against an asset you own, e.g. your house / mortgage.
An unsecured loan isn’t tied to an asset. You do not need collateral but interest rates may be higher to compensate for the lender’s risk. You will also usually have shorter repayment terms than a secured loan.
Interest protects against future rises in inflation. A lender such as a bank uses the interest to process account costs as well. Borrowers pay interest as they must pay a price for getting the ability to spend now, instead of having to wait years to save up enough money.
Description of Shares
In simple terms, a share is a percentage of ownership in a company or a financial asset. Investors who hold shares of any company are known as shareholders.
The more shares you have, the more of the company you own, and you become known as a shareholder.
The shareholder hopes to make a profit by judging supply and demand and buying shares when the price is low, then selling them when the price is higher. That’s not the only way to make money on the stock market. Some shares pay you extra income in the form of dividends, which are a share of a company’s profits.
As the company grows and becomes more profitable, the value of your shares increases in value. If you sell your shares at a higher price than what you paid for them, you will make a capital gain. However, if the share price falls below your initial purchase price, you will lose money if you sell your shares.
- ‘SHARES’ = They are small pieces of companies that people can buy. Once you buy a share, you own a small part of the company
- ‘STOCKS’ = Is a more general word, and is used when describing multiple shares in multiple companies
Description of Debenturess
A debenture is a marketable security that businesses can issue to obtain long-term financing without needing to put up collateral or dilute their equity. A debenture is a type of long-term business debt not secured by any collateral.
TYPED OF DEBENTURE:
OTBO ‘Security’= Secured & Unsecured
OTBO ‘Tenure’ = Redeemable & Unredeemable
OTBO ‘Convertibility’ = Convertible & Nonconvertible
OTBO ‘Coupon Rate’ = Specific Coupon Rate & Zero Coupon Rate
OTBO ‘Registration’ = Registered & Bearer
(OTBO = On the basis of)
Description of owner’s capital
Owner’s capital (equity) is the amount the owner of a business invests in it. It’s sometimes described as owners interest as the investment value represents an owners stake in the business. Some businesses may have a single owner, while others may have multiple.
Equity is the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all the company’s debts was paid off in the case of liquidation.
What are the 4 types of assets?
- Current
- Financial
- Fixed (non-current)
- Intangible
What is an ASSET?
Assets are resources with economic value that an individual or business owns or controls with the expectation that it will provide a future benefit.
Assets are reported on a company’s balance sheet. They’re classified as current, fixed, financial and intangible. They’re bought or created to increase a firm’s value or to benefit the firm’s operations.
An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it is manufacturing equipment or a patent.
Description of Current Assets
In accounting, some assets are referred to as current. Current assets are short-term economic resources that are expected to be converted into cash or consumed within one year. Current assets include cash and cash equivalents, accounts receivable, inventory and various prepaid expenses.
While cash is easy to value, accountants periodically reassures the recoverability of inventory and accounts receivability. If there is evidence that a receivable might be uncollectible, it’ll be classified as impaired. Or if inventory becomes obsolete, companies may write off these assets.
Description of Financial Assets
Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign & corporate bonds, preferred equality and other hybrid securities. Financial assets are valued according to the underlying security and market supply & demand.
Description of Fixed (non-current) Assets
Fixed assets are resources with an expected life of greater than a year, e.g. plants, equipment and buildings. An accounting adjustment called depreciation is made for fixed assets as they age. It allocates the cost of the asset over time. Depreciation may or may not reflect the fixed assets loss of earning power.
Generally Accepting Accounting Principles (GAAP) allow depreciation under several methods. The straight-line method assumes that a fixed asset loses its value in proportion to its useful life, while the accelerated method assumes that the asset loses its value faster in its first year of use.
Description of Intangible Assets
Intangible assets are economic resources that have no physical presence. These include patents, trademarks, copyrights and goodwill. Accounting for intangible assets differs depending on the type of asset. They can be either amortised or tested for impairment every year.
[Amortised = Gradually write off the initial cost of an asset over a period of time with regular payments]
ASSET VS LIABILITY
While an asset is something with economic value that’s owned or controlled by a person or company, a liability is something that is owed by a person or company. A liability could be a loan, taxes payable or accounts payable.
Examples of assets
PERSONAL:
- Jewellery
- Artwork
- Gold & Silver
- Checking Account
BUSINESS:
- Motor Vehicles
- Buildings
- Machinery
- Equipment
- Cash
- Accounts Receivables
WAGES VS SALARY
Wages = Hourly rate that is usually paid weekly
Salary = Annual amount that is paid monthly
Types of EXPENDITURE
- Inventory (stock) [Revenue]
- Wages & Salaries [Revenue]
- Marketing (advertisement etc.) [Revenue]
- Utilities (gas, water, electricity) [Revenue]
- Fixtures & Fittings [Capital] = things within a business needed to operate a business but not plant or machinery e.g, desk, chair
- Plant & Machinery (plant = heavy machinery) [Capital]
- Vehicles (transportation) [Capital]
- Buildings & Premises [Capital]
Revenue = day-to-day, regular payments
Capital = long-term (>1 year), one payment annually
EXPENDITURE
Expenditure is money spent by a business and can be split into 2 categories:
CAPITAL EXPENDITURE:
- Used to buy capital items (assets bought that will stay in the business for a long time)
- 2 types of capital items:
– Non-current assets
– Intangible assets
REVENUE EXPENDITURE:
- Spending on day-to-day items or on a regular basis
- These are the expenses incurred (the business has to pay it) that are shown on the profit and loss account
CAPITAL EXPENDITURE EXAMPLES
- Non-current Assets
- Intangibles:
– Goodwill
– Patents
– Trademarks
– Brand Name
REVENUE EXPENDITURE EXAMPLES
- Inventory
- Rent
- Utilities:
– Rates
– Heating & Lighting
– Water - Salaries & Wages
- Marketing
- Bank charges
- Interest Paid
- Depreciation
- Discount Allowed
- Insurance:
– Buildings
– Contents
– Public Liability
– Employer’s Liability
“Bank Charges”:
= Banks have to be paid by businesses for their bank accounts
= Businesses have to pay for their bank accounts
