A3 business purpose of accounting

• Purpose of Accounting


  • Recording transactions
  • Management of business
  • Compliance
  • Measuring performance
  • Control
• Recording transactions


  Keeping accurate and up to date records of money coming in (from sales) and money going out (such as expenses)
• Failure to record transactions accurately may mean inaccurate figures and data, and more seriously, get them in trouble with the HMRC (Government tax department) if their tax payments are inaccurate
• Management of business


  Helps planning, monitoring and controlling of the businesses resources to make accurate decisions
• Management of finance


  Allows the managers to budget properly, meet their liabilities on time (pay their bills) and gives them a clear picture of where the business is financially
• Management of finance can also help them foresee any financial problems they may have in the future
• Compliance


  Abiding by laws and regulations set out by the government
• Financial reporting is a legal requirement of businesses and so they must ensure they are completing it, doing it on time and accurately
• Failure to comply can bring charges or fines, and in some cases custodial sentences for individuals
• Being compliant helps businesses protect themselves against fraud
• Measuring performance


  Allows the business to see how it is performing by measuring its sales and profits over time to determine its level of success
• Key indicators of performance


  • Gross profit
  • Net profit
  • Value owed to the business
  • Value owed by the business
• Control


  Accounting will help the managers control the flow of money in and out of the business by tracking what is owed (trade receivables) and what they owe (trade payables)
• Failure to control the flow of money is the most common reason businesses run into trouble
• Capital Income


  Money lent to a business or owner by a bank or financial institution for a period of time, often long term (2 or 3 years+)
• Types of Capital Income


  • Loan
  • Mortgages
  • Shares
  • Owners' Capital
  • Debentures
• Loan


  Large, lump sum of money received quickly, paid back in instalments over time, can fix the interest rate or take variable, interest is charged on top, loans may need to be secured against an asset, variable rates may go up
• Mortgages


  Paid over a long period, interest rates can be low, secured against the asset/property, can be repossessed if failure to pay, interest rates can rise
• Shares


  Raises money required, can bring in support & expertise, lose some ownership of the business/control/profits
• Owners' Capital


  Free of interest charges, no need to pay back (savings), may be insufficient, can be risky if business fails (all lost)
• Debentures


  Raises substantial money, can be more flexible in repayment than bank loans, not necessarily secured, interest charged, might be difficult to pay back later if business is struggling
• Revenue Income


  Money received from the sale of goods/services
• Types of Revenue Income


  • Cash sales
  • Credit sales
  • Rent received
  • Commission received
  • Interest received
  • Discount received
• Cash sales


  Cash received immediately
• Credit sales


  Guarantees income into the business, but the business may have to wait a while to receive the cash, which may impact their cash flow
• Rent received


  Allows a business to make money from any unused property and land, but property may go for long periods being unused and therefore not generating income
• Commission received


  Is additional income that otherwise the business may not have received, it is an incentive to sell more of those products/services
• Interest received


  Is income from savings or lending which is cost free, but may not be significant if interest rates in the economy are low
• Discount received


  Reduces costs for the business, but may require the business to buy in bulk to gain the discount, or to pay up front which they may not be able to
• Expenditure

  Money spent by a business that can be split into two main categories: capital expenditure and revenue expenditure
• Capital Expenditure


  Spending on capital items, often one off, items which will last a long time like equipment, machinery and technology
• Revenue Expenditure


  Spending on day to day items or regular basis, expenses generated by the business
• Types of Capital Expenditure


  • Non current assets
  • Goodwill
  • Patents
  • Trademarks
  • Brand name
• Non current assets


  Long term assets including land/premises/machinery & equipment, are essential for business activity, help the production/processes of the business, can be resold, but are costly, lose value over time, may need replacing and maintenance/upgrading
• Goodwill


  The name & reputation and established customer base, which adds value to a business, but is hard to place value on and can be damaged/lose value
• Patents


  A legal protection of an invention, such as a product/service or new process, spending money on a patent can protect your inventions from being copied, guaranteeing you the sole rights to benefit financially, but protecting with patents costs money to register
• Trademarks


  Legal protection over symbols, logos, brand names etc, spending money on a trademark can protect your name and brand from being copied, guaranteeing you the sole rights to benefit financially from it, but can be difficult to stop others copying and costs money to register
• Brand name


  The name recognised by customers distinguishing it from competitors
• Types of Revenue Expenditure


  • Inventory
  • Rent
  • Heating & lighting
  • Water
  • Insurance
  • Administration
  • Telephone
  • Postage
  • Stationery
  • Salaries
  • Wages
  • Marketing
  • Bank charges
  • Interest paid
  • Straight line depreciation
  • Reducing balance depreciation
  • Discount allowed
• Inventory


  Stock/ raw materials/supplies to sell or make the product or to contribute to the service offered, new businesses will need to buy inventory with cash before they grown and can establish better credit terms, it's important not to over or under stock as too much stock can tie up cash that could be used elsewhere, too little may leave the business without materials for the sale of its products/services