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Financial and management accounting Reference FINANCIAL AND MANAGEMENT ACCOUNTING Pauline Weetman Financial Times/Pitman Publishing Reference BUSINESS ACCOUNTING AND FINANCE Catherine Gowthorpe Thomson Learning 2003 Why construct accounts? An historical record of financial performance

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reference
Reference

FINANCIAL AND MANAGEMENT ACCOUNTING

Pauline Weetman

Financial Times/Pitman Publishing

reference3
Reference

BUSINESS ACCOUNTING AND FINANCE

Catherine Gowthorpe

Thomson Learning

2003

why construct accounts
Why construct accounts?
  • An historical record of financial performance
  • Monitor of current performance
  • Aid to management decision making
  • Taxation and other statutory disclosures
what is accounting
What is “accounting”?

“….Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgements and decisions by users of the information….”

A statement of basic accounting theory, American Accounting Association 1996

key accounting areas
Key accounting areas
  • Operating a process
  • Identification of financial information
  • Measuring financial information
  • Communicating financial information
  • Defining a business entity
  • Defining users
  • Defining judgements and decisions of users
users of accounts

external

internal

Financial

institutions

BUSINESS ENTITY

Owners

Business

partners

Customers

Management

Government

Employees

Public interest

Users of accounts
accounting fields
Financial accounting

External reporting of performance

Management accounting

Internal reporting mechanism that provides information for those who make decisions about the business entity

Used to

Direct attention

Monitor performance

Solve problems

Accounting fields
conventions of accounting
Conventions of accounting
  • Going concern
    • the entity is likely to remain in operation
  • Matching
    • comparison of revenue and expense over a similar period of time
  • Realisation
    • revenue should not be recognised until received and expenses not recognised until incurred
  • Consistency
  • Prudence
    • underestimating revenue and overestimating costs
  • Objectivity
    • exclude personal opinion
conventions of accounting10
Conventions of accounting
  • Verifiable
    • accounts should be capable of independent verification
  • Unit of measure
    • common denominator (£ or $ or not both)
  • Periodicity
    • entity performance over a consistent period of time
  • Duality
    • every action has a consequence
  • Materiality
    • actions have to materially affect the entity
  • Relevance – all information relevant to user to be included
financial statements for the external user
Financial statements for the external user
  • Primary financial statements
    • Trading Profit and Loss Account
      • measure of performance
    • Balance sheet
      • measure of financial position
    • Cash flow statement
      • measure of financial adaptability
secondary financial statements
Secondary financial statements
  • Gross margin
    • Measure the performance of individual enterprises within the business
analysis statements
Analysis statements
  • Disposal of funds statement
the trading environment
The trading environment

A PERIOD IN TIME

MONEY

IN

MONEY

OUT

receipts
Receipts
  • Money received by the business
payments
Payments
  • Outgoings
slide17
Cash
  • Cash is money
  • Cash is a physical transaction
  • “....anytime, anywhere, anyplace...”
cash items
Cash items
  • I am giving you a £5 note
  • You are paying me £5 with a cheque
  • That crash has reduced the value of my car by £550
trading period
Trading period
  • Accounts are related to a specific time period
    • Annual - taxation
    • Monthly - regular reporting on progress
  • Cash items are adjusted to take into account the trading period
  • Allows accounts to be compared on a like for like basis
trading items
Trading items
  • Trading items relate to the payments and receipts made in order to utilize the capital assets contained within a business
capital items
Capital items
  • Capital is a measurement of the worth of items which can realise a value

eg Machinery items

Building valuation

Land

personal items
Personal items
  • Personal items are payments or receipts made by the business on behalf of or to the owner

eg Personal Drawings

Income Tax

the accounting equation
The accounting equation

ASSETS

- LIABILITIES

NET WORTH

NET WORTH is equivalent to WEALTH

assets
Assets

“….rights or other access to future economic benefits controlled by an entity as a result of past transactions or events….”

ASB (1995) Statement of Principles for Financial Reporting

examples of assets
Examples of assets
  • Land
  • Buildings
  • Machinery
  • Livestock
  • Deadstock
  • Debtors
  • Investments
assets27
Assets
  • Fixed asset
    • An asset used by an enterprise for production
    • An asset intended for use on a continual basis
    • An asset not intended for sale
  • Current asset
    • An asset likely to be converted into cash within the trading period
liabilities
Liabilities

“….obligations of an entity to transfer economic benefits as a result of past transactions or events….”

ASB (1995) Statement of Principles for Financial Reporting

examples of liabilities
Examples of liabilities
  • Overdraft
  • Loans
  • Mortgages
  • Creditors
liabilities30
Liabilities
  • Long term (fixed) liabilities
    • Liabilities expected to remain in place beyond the next trading period (12 months)
  • Current liabilities
    • Liabilities likely to be repaid within the trading period (12 months)
balance sheet format
Balance sheet format
  • Companies Act 1985
    • Specifies statutory format for companies reporting balance sheet
  • Small business have exemptions that produce a simplified format
balance sheet format companies
Balance sheet format – companies

http://www.inlandrevenue.gov.uk/manuals/pummanual/specificguidance/pum4850.htm

source of information for accounts
Source of information for accounts
  • Cash book
  • Bank statements
cash flow
Cash flow
  • Flow of money into business over a period of time
  • Information sourced from the cash book
  • Cash book is a record of all cash transactions
  • Cash surplus/deficit
net cash flow
Net Cash Flow
  • Positive
    • Money flowing IN to the business
    • Receipts > Payments
  • Negative
    • Money flowing OUT of the business
    • Receipts < Payments
effect of cash flow on bank balance
Effect of cash flow on bank balance
  • A positive net cash flow increases the bank balance
  • A negative net cash flow reduces the bank balance

OPENING BANK BALANCE

+

NCF

=

CLOSING BANK BALANCE

cash flow statement periodic42
Cash Flow statement - periodic

OPENING BALANCE = (£1400)

trading profit and loss account
Trading Profit and Loss Account
  • A measure of business financial performance during a specific time period
  • Statutory document
  • Demonstrates PROFIT or LOSS
trading profit and loss account tpla
Trading Profit and Loss Account (TPLA)

RECEIPTS (adjusted for debtors)

plus

CLOSING VALUE of stocks

less

PAYMENTS (adjusted for creditors)

less

OPENING VALUATION of stocks

revenue
Revenue
  • Receipts attributable to a period in time
expenditure
Expenditure
  • Payments attributable to a period in time
trading valuations
Trading valuations
  • Valuation of trading assets at the start and end of an accounting period that are used to operate the business
    • livestock, crops, cultivations
    • deadstock
  • Record the market value or the total cost to date at the start and end of an accounting period
creditor and debtor adjustment
Creditor and Debtor adjustment
  • Revenue = Receipts – Opening debtors + Closing debtors
  • Expenditure = Payments – Opening creditors + Closing creditors
deadstock reconcilliation
Deadstock reconcilliation
  • Items of Deadstock need to be reconcilled for expenditure, amount used and opening and closing stocks
  • EXPENDITURE items of are placed in the TPLA and items USED in Gross Margins

OPENING + EXPENDITURE = USED + CLOSING

or

OPENING + EXPENDITURE - USED = CLOSING

non cash receipts
Non Cash Receipts
  • NON CASH RECEIPTS are items produced by the business and consumed by the owner without any cash transaction taking place
  • Included as a trading item of revenue
adjusting for personal use
Adjusting for personal use
  • Personal items are excluded from trading accounts
    • Income tax
    • Private use of vehicle
    • House electricity, water, telephone
    • Private drawings
depreciation
Depreciation
  • “…. A measure of the wearing out, consumption or other reduction of the useful economic life of a fixed asset, from a range of causes….”

FINANCIAL AND MANAGEMENT ACCOUNTING Pauline Weetman

straight line depreciation
Straight line depreciation

DEPRECIATION = 10% of ORIGINAL BALANCE

reducing balance depreciation
Reducing balance depreciation

DEPRECIATION = 25% of OUTSTANDING BALANCE

loans and mortgages
Loans and mortgages
  • Major long term liabilities
  • Loans
    • Usually no security
    • 1-10 years
  • Mortgages
    • Land used as security
    • 10-40 years
loan schedule
Loan schedule
  • Repayments are treated as capital and excluded from TPLA
  • Interest payments are trading items and are included in TPLA
company accounts must include
Company accounts must include
  • a profit and loss account
  • a balance sheet signed by a director
  • an auditors' report signed by the auditor (if appropriate)
  • a directors' report signed by a director or the secretary of the company
  • the notes to the accounts
  • group accounts (if appropriate)

Companies Act 1985

(as amended in 1989 and later)

reconciling accounts
Reconciling accounts
  • Check for accuracy of calculations
    • Profit and Profit
    • Profit and Net Cash Flow
    • Opening and Closing Net Worth