Chapter 7 – Business
Accounting
Syllabus Unit – Business Finance and
Accounting
You will learn …………….
• What is meant by “accounts”
• Why businesses need to keep accounting
records and use financial documents
• Who uses these accounting records
• What final accounts of a company contain
– Profit and Loss Account
– Balance Sheet
• How the published accounts can be used
to analyse the performance of a business
Introduction
• Accounts
– The financial records kept by a
business
• Accountants
– Professionally qualified people
who have the responsibility for
keeping accurate accounts
and for producing the final
accounts
Why are accounts necessary?
• Collection of money from customers
• Ordering stock within limits
• Cash flow
• Profit/Loss
• Tax
Financial Documents involved in
Buying & Selling
•
•
•
•
•
•
•
Purchase Order
Delivery Notes
Invoices
Credit Notes
Statement of Accounts
Remittance Advice Slips
Receipts
Purchase Order
Purchase Order
To:
Sweet Wholesalers Ltd
Manor Road
Newtown
Abdul Sweets Ltd
15 Old Road
Newtown
Tel: 0381 865 4121
Fax: 0381 865 4022
Date: 18/4/10
Order No: 02/136
QUANTITY
DESCRIPTION
TOTAL PRICE
3 boxes @ $80
2 boxes @ $50
1 Box @ $50
Belgian Chocolates
Crunch Nuts
Juicy Fruits
TOTAL $240
TOTAL $100
TOTAL $50
Deliver ASAP to the above address
TOTAL $390
Delivery Notes
• Used by supplier
– Confirm goods have been received
– Sign when goods delivered
Invoices
• Sent to
supplier
from
customer
– Request for
payment
for goods
delivered
– Should be
checked
Credit Notes
• Issued if a
mistake has been
made
– Wrong goods
supplied
– Shortage of
products
– Wrong price
charged
Statement of Account
Statement of Account
To:
Sweet Wholesalers Ltd
Manor Road
Newtown
Sweet Wholesalers Ltd
Manor Road, Newtown
Tel: 0381 862 3002
Fax: 0381 862 3220
Email: accounts
@sweetwholsalers.com
Account: Abdul Sweets
Ltd
Date
Invoice No.
Reference
$ Value
Outstanding
8/9/09
13/9/09
21/9/09
360
421
560
275X
273Z
2715A
240
100
390
Total 240
Total 100
Total 390
Total $630
Remittance Advice Slips
• Usually sent with “statement of account”
• Indicates which invoice is being paid
• No duplication
Receipts
• Issued when
customer
pays an
invoice
Methods of Payment
Recording Accounting
Transactions
Recording Accounting
Transactions
Who uses the final accounts in
business?
Trading Account (Basic)
• Shows how the gross profit of a business
is calculated
Sales Revenue
$50,000
Cost of Goods Sold $20,000
Gross Profit
$30,000
Trading Account
Sales Revenue
Cost of Goods Sold
Gross Profit
3,000
1,500
????
25,000
16,000
????
80,000
?????
20,000
?????
25,000
50,000
Trading Account (Typical)
Newtown Trading Ltd
Trading Account for year ending 31/3/10
Sales Revenue
Opening Stock
Purchases
Total Stock Available
Less Closing Stock
Cost of Goods Sold
Gross Profit
$55,000
$10,000
$25,000
$35,000
$12,000
$23,000
$32,000
Trading Account
Cost Per
Unit
Opening
Stocks
Purchases
of Goods
Closing
Stocks
Cost of
Goods
Sold
$3
500
3,000
200
$9,900
$2
1,000
5,000
500
?????
$5
100
400
300
????
$1
2,000
60,000
2,000
?????
Trading Account
• Manufacturing Business
– Direct Labour & Direct Production Costs will
be deducted before arriving at the gross profit
total
Any more
deductions
need to be
made?
Profit and Loss Account
• It shows how the “net
profit” of a business and
the retained profit of a
company are calculated.
• Net Profit
– Is the profit made by a
business after all costs
have been deducted from
sales revenue
– Gross Profits – Overhead
Costs
Newtown Garden Nursery
Profit and Loss Account
For the year ending 31/3/09
Gross Profit
Non-Trading Income
Less Expenses:
Wages and Salaries
Electricity
Rent
Depreciation
Selling and Advertising Expenses
Net Profits
$32,000
$ 5,000
$37,000
$12,000
$ 6,000
$ 3,000
$ 5,000
$ 5,000
$31,000
$ 6,000
Depreciation
• It is the fall in value of a fixed asset over
time.
Profit and Loss Account for
Limited Companies
• Appropriation Account
– After tax is distributed
– either as dividends or kept in the
company as retained earnings
• Retained Profit
– The net profit reinvested back into
the business, after deducting tax
and payments to owners, such as
dividends
Profit and Loss Account for
Limited Companies
2005
Sales Turnover
Cost of Sales
Gross Profit
Operating Expenses
Operating Profit
Interest Payable
Net Profit (Profit before Tax)
Corporation Tax
Profit After Tax
Dividends
Retained Profit
($000)
1,250
900
350
105
245
50
195
35
160
120
40
2004
($000)
1,300
900
400
120
280
40
240
40
200
130
70
Profit and Loss Account for
Limited Companies
2005
Sales Turnover
Cost of Sales
Gross Profit
Operating Expenses
Operating Profit
Interest Payable
Net Profit (Profit before Tax)
Corporation Tax
Profit After Tax
Dividends
Retained Profit
($000)
1,250
900
350
105
245
50
195
35
160
120
40
2004
($000)
1,300
900
400
120
280
40
240
40
200
130
70
Try this!
• Using the pattern of a typical profit and
loss account
• Calculate the retained profits of ABC Ltd
for the year ending 31/3/2005 from the
following data
Sales Revenue
Tax Paid
Operating Expenses
Cost of Sales
Interest Paid
Dividends
($000)
280
40
30
100
15
25
Balance Sheet
• Balance Sheet
– Shows the value of a businesses' assets and
liabilities at a particular time
• Assets
– Items that are owned by the business
– S-T (Current)
– L-T (Fixed)
• Liabilities
– Items owed by the business
– S-T (Current)
– L-T
Balance Sheet
• Fixed Assets
– Items that are used by
the business for more
than one year
• Current Assets
– Items that are used by
the business for less than
one year
– Cash, Stocks, and
Debtors
Balance Sheet
• Long-Term Liabilities
– Borrowings which do
not have to be repaid
within one year
• Short-Term
Liabilities
– Borrowings which
have to be repaid
within one year
Balance Sheet
• Owners Wealth (Shareholder’s wealth)
– Total Assets – Total Liabilities
Age Engineering
Balance Sheet as at 31/3/2005 ($000)
Fixed Assets
Land and Buildings
Machinery
Current Assets
Stocks
Debtors
Cash
Less
Current Liabilities
Creditors
Bank Overdraft
Working Capital (Net Current Assets)
Net Assets
Financed by:
Shareholders’ Funds
Share Capital
Profit and Loss Reserves
Long-Term Liabilities
Long-Term Bank Loan
Capital Employed
2005
2004
450
700
1,150
440
600
1,040
80
50
10
140
50
60
15
125
65
65
130
40
60
100
10
1,160
25
1,065
500
360
500
320
300
1,160
245
1,065
Balance Sheet Terms
• Working Capital (Net Current Assets)
– Current Assets – Current Liabilities
– Used to pay short-term debts
• Net Assets
– Fixed Assets + (Current Assets – Current
Liabilities)
– Fixed Assets + Working Capital
– Net Value of Assets
– Paid for by “shareholder funds” or “long-term
liabilities
Balance Sheet Terms
• Shareholder’s Funds
– Total sum of money invested in the business
• Share capital
– Money invested by shareholders
• Reserves
– Retained Profits
• Capital Employed
– Shareholder’s Funds + Long-Term Liabilities
– Total long-term and permanent capital of a
business
– Capital Employed = Net Assets
Where is it found?
• What was the gross profit of the business?
• What dividends did we pay our
shareholders?
• What is the total value of our current
assets?
• What expenses did the business incur last
year?
• What was the net profit of the business?
• What is the capital employed of the
business?
Categorize the following
Published Accounts
• What do published accounts tell us?
– The performance of a company?
– The financial strength of a company?
• Without further analysis, the answer is –
not a great deal!
Ratio Analysis of Accounts
• Liquidity
– It is the ability of a
business to pay back
its short-term debt
Ratio Analysis of Accounts
• Performance Ratios
– Return on Capital Employed
Operating Profit
X 100
Capital Employed
Ratio Analysis of Accounts
• Performance Ratios
– Gross Profit Margin
Gross Profit
X 100
Sales Turnover
Ratio Analysis of Accounts
• Performance Ratios
– Net Profit Margin
Net Profit Before Tax
X 100
Sales Turnover
Ratio Analysis of Accounts
• Liquidity Ratios
– Current Ratio
Current Assets
Current Liabilities
Ratio Analysis of Accounts
• Liquidity Ratios
– Acid-Test Ratio
Current Assets - Stocks
Current Liabilities
Ratio Analysis of Accounts
• Used to compare with
– Other years
– Other businesses
• Disadvantages
– Based on past results, doesn’t indicate how a
business performance in the future
– Results affected by inflation
– Different accounting methods