Unit 11

• The purpose of accounting centers on the collection and subsequent reporting of financial information.
• Generally Accounting is to keep track of all the incoming and outgoing money from a business in order to: Provide information, Record transactions, Using a general ledger is part of a system used by accountants to create the firm's financial statements.
• Double entry bookkeeping


  A general ledger is used by businesses that employ the double-entry bookkeeping method, which means that each financial transaction affects at least two general ledger accounts and each entry has a debit and a credit transaction.
• To monitor performance


  Accounting is used to track how well or not a company is doing, monitoring sales, orders, cost of goods bought etc. This information can be used for purposes such as: Forecasts, Budgets.
• Double entry bookkeeping


  A system of accounting where every transaction has a debit entry and a corresponding credit entry
• Ledgers


  Accounting records that systematically organise financial transactions
• Liquidity


  A measure of a company's ability to pay off debts as they come due, that is, to have access to their money when they need it
• Profitability


  The ability of a business to earn a profit
• Efficiency


  The comparison of what is actually produced or performed with what can be achieved with the same consumption of resources (money, time, labor, etc.)
• Internal users of accounting information

  • Management
  • Employees
  • Owners
• External users of accounting information

  • Investors
  • Customers
  • Lenders
  • Suppliers
• Sole trader


  The owner is responsible for everything that happens within the company
• Accounting requirements for sole traders


  • Keep all invoices and receipts for 6 years
  • Keep record of money earned and expenses
  • Complete a Personal Tax Return
  • Pay Self Assessment Tax and National Insurance
• Accounting requirements for private limited companies


  • Keep details of directors, shareholders and company secretaries
  • Keep records of shareholder votes and resolutions
  • Keep records of loans, mortgages and indemnities
  • Keep a register of 'people with significant control'
  • Keep accounting records including money received/spent, assets, debts, stock
• Income statement


  Identifies gross profit and profit for the year
• Revenue


  The receipts from the sales of goods and/or services by a company
• Overheads


  The expenses incurred by a company during the financial year
• Profit from operations


  The profit earned by a company before deducting finance costs and taxation
• Finance costs


  Interest paid on all debt
• Dividends


  The rewards paid to shareholders out of profits earned by a Limited company
• Ordinary dividends


  Variable in nature, the dividend will vary according to the company's performance
• People with significant control (PSC)

  Anyone who:

  • Has more than 25% shares or voting rights in your company
  • Can appoint or remove a majority of directors
  • Can influence or control your company or trust
• Accounting records must include

  • All money received and spent by the company

  Details of assets owned by the company and debts the company owes or is owed

  Stock the company owns at the end of the financial year

  The stock takings used to work out the stock figure and all goods bought and sold

  All money spent by the company, for example receipts, petty cash books, orders and delivery notes

  All money received by the company, for example invoices, contracts, sales books and till rolls

  Any other relevant documents, for example bank statements and correspondence
• Dividends


  The rewards paid to shareholders out of profits earned by a Limited company. They are paid to individual shareholders in proportion to the number of shares they own. Dividends are paid annually, but most Limited companies will pay interim dividends part way through their financial year.
• Ordinary dividends


  Variable in nature. The dividend will vary according to the level of profits earned by a company.
• Preference dividends


  Normally a fixed amount
• Debenture interest


  Paid to debenture holders (investors) who have loaned money to a company. The interest is usually paid in two equal instalments during the year.
• Accounting requirements for public limited companies

  • Annual financial statements must be audited by professionally qualified personnel

  Annual returns must be completed and filed with the Registrar of Companies. These returns may be inspected by the general public.

  The financial statements included as part of the annual return lack much of the detail that could be used by a competitor.

  Companies are usually regulated by government legislation and / or agencies.

  Copies of the company's annual audited financial statements must be sent to each shareholder and debenture holder.
• Accounting responsibilities for third sector organisations

  • The voluntary management committee has a responsibility to report on the financial position of your organisation

  Keeping proper financial records throughout the year, with the end of year accounts normally produced at the end of a financial year

  Accounting records must be kept for 6 years after the end of the financial year to which they refer

  Under statutory requirements, charities' accounts must be externally scrutinised – either by independent examination or audit. The type of external scrutiny depends on the charity's governing document, gross income and net assets, and whether or not the charity is also a company

  A Statement of Recommended Practice (SORP) provides recommendations on how accounting standards should be applied in the context of particular sectors and how to account for sector specific transactions.
• Partnership


  The relationship which subsists between persons carrying on business with a view of profit.
• Accounting for a partnership

  • Each partner has a separate capital account for investments and their share of net income or loss, and a separate withdrawal account

  The net income or loss is added to the capital accounts in the closing process

  The withdrawal account is also closed to the capital account in the closing process
• Accounting concepts and policies

  • Consistency concept - once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise

  Going concern - the business entity for which accounts are being prepared is in good condition and will continue to be in business in the foreseeable future

  Prudence concept - revenue and profits are included in the balance sheet only when they are known to be true (or there is reasonable 'certainty' of knowing this) but liabilities are included when there is reasonable 'possibility' of incurring them

  Matching - transactions affecting both revenues and expenses should be recognised in the same accounting period in order to balance the books, and minimise overruns in the next financial quarter or year

  Materiality - minor events may be ignored, but the major ones should be fully disclosed
• Accounting Equation


  Assets = Capital + Liabilities
• Capital


  Funds raised to support a particular business or project. Can also represent the accumulated wealth of a business, represented by its assets less liabilities.
• Equity


  Invested money that, in contrast to debt capital, is not repaid to the investors in the normal course of business. It represents the risk capital staked by the owners through purchase of a company's common stock (ordinary shares).
• Types of Assets


  • Physical (cash, machinery, inventory, land and building)
  • Enforceable claims against others (accounts receivable)
  • Rights (copyright, patent, trademark)
  • Assumptions (goodwill)
• Intangible Assets


  Assets that cannot be sold easily in order to gain capital
• Tangible Assets


  Assets that can be sold easily to improve cash-flow
• Liabilities


  Accounts and wages payable, accrued rent and taxes, trade debt, and short and long-term loans. Owners' equity is also termed a liability because it is an obligation of the company to its owners.
• The accounting equation could also be written as Liabilities = Assets – Shareholder Equity and Shareholder Equity = Assets – Liabilities