Accounting

• Accounting


  The recording, summarising and communicating of financial information in a meaningful way which is useful to both internal and external users
• How financial information is communicated


  • Financial Accounting
  • Management Accounting

  
• Financial Accounting


  • Aimed to show the financial performance and financial position of a business
  • Provides historical information reported on an annual basis
  • Highly regulated, prepared according to accepted accounting conventions
• Management Accounting


  • Primarily concerned with providing useful information for decision making, planning ahead, and controlling the business
  • Very detailed, specific information delivered on a frequent basis
  • No pre-set format, often involves planning for the future
• Budgeting


  1. Set of strategy (vision, mission, long-term goal)

  2. Sales Budget

  3. Production Budget

  4. Cash Budget, Profit Budget
• Cash Budget


  A forecast of future cash receipts and payments that business expects to make over a specific period of time
• Objectives of the Cash Budget


  • To identify potential deficits and surpluses
  • To control cash expenditure and avoid unnecessary expenses
  • To ensure that cash is sufficient to continue operating over the given time frame
• The structure of the cash budget includes Balance brought forward (b/f) and Balance carried forward (c/f)
• Balance (c/f) = Balance (b/f) + Total Receipts - Total Payments
• Financial Accounting is the process of recording, summarising and reporting business transactions in a time period
• Management accounting is the process of generating financial and non-financial information for business managers to help them in their day-to-day running of the business
• The Cash Budget is an estimation of cashflows of a business over specific period of time
• Cash


  Money available to the business
• Difference between cash and profits


  • Business activities that cause this difference
• Statement of Profit or Loss


  Financial statement that summarises the revenues earned and expenses incurred by the business throughout the period
• Calculating the cost of sales


  1. Opening Inventory + Purchases = CoS + Closing Inventory

  2. CoS = Opening Inventory + Purchases - Closing Inventory
• Classification of expenditure


  • Capital expenditure (benefit for more than one accounting period)
  • Revenue expenditure (day-to-day business expenses)
• Cash and profits are different items
• Revenues or Sales


  Income earned from selling goods or services
• Expenses


  Costs incurred by the entity to enable the business to trade
• Business activities that result in a difference between cash and profit


  • Financing activities (capital investment, loans, capital withdrawal, loans repayment)
  • Investing activities (purchase of assets, disposal of assets)
  • Timing difference (credit sales, credit purchases)
• Danni the drinks-seller


  • Bought 550 cans at €2 each, sold 500 drinks at €3 each
  • Some friends bought drinks for €30 and promised to pay next week
  • Bought a fridge for €280
  • Spent €50 on dinner with friends
• Danni's bank balance increased by €40 that week
• Danni made a profit of €500 that week
• Difference between cash and profit due to: credit sales, unsold goods, purchase of asset, drawings
• Gross profit


  Sales - Cost of Sales
• Net profit


  Gross profit - Other expenses
• The Statement of Profit or Loss


  1. Sales or Revenue

  2. Cost of sales (X)

  3. Gross profit

  4. Other expenses (X)

  5. Net profit
• The cost of sales (CoS) is the cost of goods sold in a period
• Purchases are the costs incurred in buying the goods for resale
• Inventories are goods for resale held in stock
• CoS should not include the value of any goods that have not yet been sold
• Capital expenditure


  Business will benefit for more than one accounting period (e.g. purchase of delivery van, building, machinery)
• Revenue expenditure


  Day-to-day business expenses (e.g. cost of goods sold, telephone payment, staff salary, rent payment)
• Profit or loss is calculated by comparing sales with revenue expenditure
• Statement of Cash Flows (SoCF)


  Summarises the cash received and cash paid throughout the period

  
• Statement of Profit or Loss (SoPL) or Income Statement


  Summarises the revenues earned and expenses incurred by the business throughout the period
• Receipts recorded once cash is collected, payments recorded once cash is paid in SoCF
• Sales recorded once a product/service is sold/delivered, expenses recorded once they are actually incurred in SoPL