Business unit 3

• There are four functions of money:
• There are 4 functions of money: unit of account (to place a value on something), means of exchange (used to sell, buy or trade goods and services), store of value and legal tender (national currency of a country).
• Why we plan expenditure: control costs, remain solvent, avoid bankruptcy, counter inflation.
• Methods of payment: cash, debit card, credit card, cheque, electronic transfer, direct debit, standing order, prepaid cards, contactless cards, charge cards, store cards, mobile banking, BACS and Faster Payments, CHAPS.
• CHAPS- Guaranteed same-day transfer. A fee is charged.
• BACS- takes three days to transfer payment from one account to the other. Faster payments- transfer takes place within two hours. No fee.
• Current accounts- standard account, premium account, student account, basic account.
• Standard account

  • No banking fees
  • Cheque book
  • Bank card
  • Set up direct debits
  • Overdraft facilities
• Premium account

  • packaged benefits e.g., travel insurance
  • interest on credit balances
  • cash back on household bills paid by direct debit
  • special rates of interest on overdrafts
  • some of the benefits provided may not be required or used by the account holder
• Student account

  • interest free overdraft
  • debit card
  • some offer free gift cards
• Basic account

  • no banking fees
  • debit card
  • set up direct debit to pay bills
• Types of borrowing: overdraft, personal loan, hire purchase, mortgage, credit card, payday loan
• • Overdraft- A loan that allows a business to borrow more than it has in its current account.
  • Adv- free to set up. Only pay interest on the money you borrow.
  • Dis- Interest is high and charged a fee to use the overdraft. If it is not arranged, you will be charged a fee.
• Personal loan- you borrow a fixed amount then pay it back over monthly instalments.

  • Adv- allow you to plan expenditure
  • Dis- arrangement fees which add to cost
• Hire purchase- you put down a deposit then pay it back over monthly instalments. During the payment, you hire the item.

  • Adv- allows you to buy an expensive item at an amount you can afford
  • Dis- you cannot sell the item during the payment
• Mortgage- A loan secured by a mortgage on the property.
• Credit card- used to buy goods and services. You can spend up to the limit of the credit card.

  • Adv- if you pay the full amount of all your expenses you will pay no interest
• ISA- Allows you to save without paying tax on the interests or profit you earn. There is a limit on the amount you can put.
• Consumer advice- citizens advice, Independent financial advisors, price comparison websites, debt counsellors, money advice service, IVA (individual voluntary arrangements).
• Citizens advice- free, confidential, independent advice on welfare benefits, housing, employment, consumer rights.

  • Adv- helpful for low-income citizens and a useful first point of call
  • Dis- advisors are volunteers, not able to deal with complex situations.
• IFAs- Profession providers who offer advice on financial matters to clients. Independent advice.

  • Adv- do not receive commission from any of the financial products they recommend.
  • Dis- charge for their services
• Price comparison websites- websites that compare features and prices of different types of financial products provided by a range of suppliers.

  • Adv- free to access and personalised to the needs of the consumer.
  • Dis- requires a computer with online access.
• Debt counsellors- specialist agencies or individuals. Provide information for individuals struggling with debt.

  • Adv- personalised advice on budgeting. Authorised by the FCA.
  • Dis- charge a fee for their service
• Money advice service- government agency. Free and impartial money advice to help improve finances.

  • Adv- online tools
  • Dis- required a computer with online access to use the budgeting tools.
• IVA- Individual Voluntary Arrangement. A formal agreement between an individual and their creditors to pay less than the full amount owed. A person who is declared bankrupt will have to use some of their assets to pay off their debts.
• Purposes of accounting:

  • Recording transactions
  • record cash flow
  • enables them to keep track of payments
  • Management of business
  • planning, monitoring and controlling
  • Compliance
  • help to combat fraud
  • Measuring performance
  • measure financial performance through: gross and net profit, sales revenue, efficiency in collecting money, expenditure and costs.
  • Control
  • trade receivables- debts generated by the sale of products. (money owed to the business)
  • trade payables- debts created as a result of purchasing products (money owed by the business)
• Capital income- money used to set up a business.

  • Loan
  • Mortgage
  • Shares
  • Debentures
  • a type of bond issued by large companies.
  • Owner's capital
  • the owner invests their personal savings in the business.
• Revenue income

  • cash sales
  • credit sales
  • rent received
  • commission received
  • interest received
  • discount received
• Capital expenditure- investment in new assets, machinery, equipment, buildings.

  • non-current (tangible)- land, buildings, machinery
  • intangible- goodwill, trademarks, brand name, patents
• Depreciation: The decline in value of a currency over time.

  • Straight line- reduces the same amount each year over its life.
  • Reducing-balance- shows the loss of value as being higher during the early years.
• Revenue expenditure: The expenditure of a business on its own operations.

  • rent
  • inventory
  • discount allowed
  • interest paid
  • bank charges
  • wages
  • depreciation (straight line and reducing balance)
  • marketing
  • salaries
  • stationery
  • postage
  • insurance
  • utilities
• Owner's capital- the money invested by the owner in the business.
• Debt factoring- a business sells its invoices to a third party for a fee.
• Crowd-funding- a form of financing whereby a business or individual raises money from a large number of people.
• Venture capital- investment in a new business by a group of investors.
• Leasing- A contract whereby the owner of an asset obtains it to another party for a specified period of time. (rent).
• Trade credit- A business can borrow money from another business to pay for goods and services.
• Grants- money given from the government to a business to help them develop a new product or service.
• Inflows- cash sales, credit sales, loans, capital introduced, sale of assets, interest received.
• Outflows- cash purchases, credit purchases, rent, rates, salaries, wages, utilities, purchase of assets, VAT, interest paid.