Section C Understand The Purpose Of Accounting Flashcards
What is accounting
Accounting involves the recording of financial transactions to produce financial information
Name 4 reasons for accounting
- recording transactions
- management of business (planning,monitoring and controlling)
- compliance (preventing fraud, compliance with law and regulations)
- measuring performance
What’s the difference between trade receivables and trade payables.
Trade receivables - money owed to business FROM SALES MADE but not yet paid for
Trade payables - money the business owes FROM SUPPLIES PRODUCED but not yet paid for
What are debtors and creditors
Debtors - valued owed TO the business
Creditors - valued owed BY the business
What are fixed assets (non-current assets)
Items of value owned by the business that last more than a year eg. Machinery.
What are the two types of income
Capital income
Revenue income
A loan is a type of capital income. Explain what it’s purpose is and what it does
A loan is the amount of money lent to the business by a bank.
It is a lump sum that then has to be paid back at a set amount per month over the period of the loan.
Interest is charged, which is added to borrowed sum.
A mortgage is a type of capital income. Explain what it’s purpose is and what it does
A large sum of money lent by a bank over a long period of time.
It is always secured against an asset
It is usually for a property or premise
A share is a type of capital income. Explain what it’s purpose is and what it does
When a business becomes a company through registration, it issues shares to its shareholders
Shareholders become owners and contribute towards capital income
More shares = more decision-making power
More investment = great potential Return through dividends
Dividends:
These are portion of a companies profit that chooses to return to its shareholders
It’s one of the ways, a shareholder can earn money from an investment without having to sell shares
A debenture is a type of capital income. Explain what it’s purpose is and what it does
-This is a written agreement that is recorded at companies house between borough and a lender
-It provides the lender with assurance that the borrowers assets are secure
-Large businesses often use it to gain capital
-fixed date of repayment is set
-a debenture provides a lender with greater security than a conventional loan agreement
-issued by government, and to have a term longer than 10 years
Owners capital is a type of capital income. Explain what it’s purpose is and what it does
This is money invested from personal savings eg. Sole trader:
A sole trader is a self-employed person who owns a company on their own. It is easy to set up, and they have unlimited liability.
What is revenue income, include where it comes from
This is the money received by the business through performing at day-to-day function – selling goods or providing services
Comes from:
Cash sales
Credit sales
Rent received
Commission received
Interest received
Discount received
What are debentures
- a form of long term loan which gives the borrower finance
- large companies or banks typically issue these
- an official capital loan
- interest is payable to lender
- there is a fixed date where the borrower will need to repay the loan by
What is depreciation
- A reduction in a particular asset due to wear and tear
- an accounting technique used to spread the cost of an asset over its useful life
What are capital items
Assets bought from capital expenditure (money going out) eg. Machinery and vehicles in the business for more than a year
