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What is Accounting?
There is no one agreed definition of accounting Most commentators agree that accounting involves the
Process of identifying, measuring, recording and communicating financial information to permit informed judgements and decisions by users of the information Collection & monitoring of financial data providing information about the activities of business
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Management information:
Prepare regular financial information e.g. monthly management accounts showing sales, costs and profits against budgets, forecasting cash flows, cost investigations Providing other stakeholders with legal/vital information
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Purchase ledger
Shows how much is owed by business to suppliers who have provided goods and services on credit
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Financial Statements
Profit and loss account
Shows how business has traded for a specific period
Balance sheet
Shows the assets and liabilities of a business at a particular time, and how those assets and liabilities have been financed
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Gross margin
A profitability ratio Calculated as gross profit divided by sales Expressed as a percentage
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Cost of Sales
Measures the costs directly associated with making products; e.g.
Raw materials & packaging Cost of labour working directly on each product Cost of running machines/equipment
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Overheads
Costs not directly involved in production process
Cost of premises e.g. rent, insurance, repairs Office costs e.g. stationery, postage, computer maintenance, staff salaries and wages Sales and marketing costs e.g. salaries of salesmen, advertising Finance costs e.g. bank charges, interest on bank loans
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Capital expenditure
Money spent on long term assets which are used over and over again E.g. Buildings; machinery; computer systems (hardware)
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Net Profit
Calculated as gross profit less overheads Final profit of business from its normal activities
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Balance Sheet
A snap shot of business at a point in time balance sheet date Shows what business OWNS, IS OWED and OWES OWNS - Assets such as buildings, stock and cash IS OWED - Money from debtors OWES - Money to creditors and bank PLUS owes money to investors/owners of business (they own profit)
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Fixed Assets
Assets that provide a benefit for business for more than 12 months Assets that business intends to keep
Land and buildings Plant and machinery Company cars
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Depreciation
Assets reduce in value over its useful life due to wear and tear and obsolescence Depreciation is an estimate of how much the value of fixed assets have fallen since they were bought Reduces original value of an asset by charging an amount every year of its useful life to profit and loss account
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Current Assets
Stocks finished goods, work in progress and raw materials (note: also called inventories) Debtors people who owe business money Cash in bank and in cash box
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Current Liabilities
Creditors money owed by business in short term Bank overdraft amounts due within next 12 months
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Provisions
Where business makes a charge against profits for something expected to happen E.g. charging against profits a reduction in size of debtors because it is expected that a debtor owing money will fail to pay This is called a bad debt. A business might also decide to make a provision for some kind of claim against business e.g. a legal claim for damages.
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Capital
Amount of long-term money put into business to buy assets Main forms of capital: Owners money (share capital) Retained profits (profit not paid out as dividends) Long term bank loans
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Use of funds
How the cash was used (e.g. purchase of assets, repayments on bank loans)
Different from a cash flow forecast which looks at future movement of cash
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Note: sole traders and partnerships are not required to publish their accounting information publicly like companies. However, they will still need to produce accounts to show to the banks and to calculate tax payments
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