Btec Business Level 3 Year 1 – Introduction to Accounting Essay Example

it is the diversity between Next total revenue and how much it cost to make the product or buy goods in.

Accounts are kept for example:Legal reasons, All UK businesses, from sole traders to Plc's must produce annual accounts and submit them to the Inland Revenue, and (in the case of Limited Companies) to Companies House. Tax liabilities are calculated from the annual accounts and expert knowledge of tax law is essential to minimise those tax liabilities.

Internal use Employees: They will be interested in Accounts records because they want to know how much profit Next has made over the financial year. They also want to know if they will get a salary increase.

Managers: Accounts records can help the managers to make important financial decisions.

External stakeholders - People who have interest in the decisions that business make are called stakeholders. Most decisions affect a number of stakeholders.* Suppliers want steady orders and prompt payment. They also want to feel valued by the company that they supply.

Keeping Account records helps business to ensure records of weekly payment to suppliers.

Customers: They want a company to produce high quality, valued for money products. Customers often identify with the brands they buy. For example, clothes purchasers want their clothes to be the best

available within a particular collection. Account records stabilised a company or business.

And if a company is stabilised, with no financial problems customers will be happy with that company.ShareholdersIn small private firms shareholders are in direct contact with managers and in, many cases are directors of the company. They have the ability to influence the accountant to keep the records of both history and future. However, shareholders can exert influence through threatening by selling shares. As a result, managers and directors must at least keep shareholders satisfied. Pass twoDiscuss the differences between capital and revenue items of expenditure and income.

Three businesses that I have selected for this task that are given below also with information: Capital income include on introduction paragraph about the essay and purposes the money contributed by the proprietors to an organisation to enable it to function; thus share capital is the amount provided by way of shares and the loan capital is the amount provided by loans.

Items of capital income include the following: Sole traders: A sole traders is an individual that owns a small business such as a plumber. A sole trader generates all the income needed to start a business by himself. If something needs doing for the business like buying or paying for a shortage item/broken item, the sole trader has to find the money all by himself and provide a solution.Partners: Unlike a sole trader, when 2 or more people are together, a partnership is formed. This means it is the responsibility of all partners to contribute into the business also liable for all debts and other obligations of the venture as well as for the management and

operation of the partnership.

Shares: Shareholders can also come together and contribute capital into the business. Selling is a nice way to raise larger amounts of money for the organisation. There are other types of shares such as ordinary shares (ordinary shareholders are entitled to receive dividend, which are a share of the firm's profits each year, since profits will vary from year to year, ordinary share dividends may rise and fall annually). And deferred shares (the deferred share requires that dividends are only paid after certain amounts are paid out to ordinary shareholders). A mortgage is a large loan, income coming into the business, normally given for the buying of property. Business can take a mortgage and use it as an investment.

Revenue Income is the total amount of money received by the company for goods sold, or services provided during a certain time period. It also includes all net sales, exchange of assets, interest and any other increase in owner's equity and is calculated before any expenses are subtracted. Net income can be calculated by subtracting expenses from revenue. Item of revenue income includes:Sales may be for cash or as credit transactions.

Cash sales are often best because the organisation receives the capital for the sale immediately. However, firms will often have to offer credit facilities to encourage growth in sales. Credit sales include supplying the goods or services to the customer but allowing the customer time to pay for the item, typically this will be 28 days.

Rent received: If a firm owns property that it rents out to another company or person, the rental income received will be a source of revenue income for the

business. Somewhere in the business buildings are unused rooms on a company's premises, or buildings that they do not currently need, it will makes sense to earn some income for the company by renting these out.

Commission received: The organisation may sell goods and services on behalf of another business and will receive a commission for the job done e.g. when a phone store sells mobile phones to any customers; the store receives commission from the network operator, such as Vodafone or T-Mobile, for finishing the sale.Capital expenditure is expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets, or to add to the value of an existing fixed asset or upgrade it.

Capital expenditure is used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. Examples of capital expenditure include: Fixed assets: A long-term tangible piece of property that a firm owns and uses in the production of its income which is not expected to be consumed or converted into cash any sooner than at least one year's time.

Tangibles: An asset that has a physical form such as machinery, buildings and land.Buildings, real estate, equipment and furniture are good examples of fixed assets.

Generally intangible long-term assets, such as trademarks and patents, are not categorised as fixed assets but more specifically referred to as 'fixed intangible assets'.

Intangibles: The firms can also pay for some things that may not be touched, known as intangibles, which are not physical items yet still have considerable value for the business. Here are the most common intangibles that we may come across.

Goodwill - An account that

can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company is purchased by another company. In an acquisition, the amount paid for the company over book value usually accounts for the target firm's intangible assets.

E.g. when calculating the sale price, the owner of a business will often therefore add an amount on top of the actual value of the assets of the business to take account of these factors and it is known as goodwill and appears as an intangible asset in the accounts of the firm.

Patents - A government license that gives the holder exclusive rights to a process, design or new invention for a designated period of time. E.g.a business that owns the patent to an invention or idea clearly owns a value able asset because it can lead to unique goods that will sell to customers and businesses might buy a patent and this then becomes another intangible asset.

Trademarks - A symbol, word, phrase, logo, or combination of these that legally distinguishes one company's product from any others. Any infringement on a trademark is illegal and therefore grounds for the company owning the trademark to sue the infringing party. A good example of trademark is Coca-Cola's wave.

Revenue expenditure - Includes amounts of expense as part of routine business activity, throughout the financial year. For example, rent, insurance, depreciation of fixed assets, repair and maintenance costs etc. Any regular financial commitment is known as revenue expenditure and is shown on the profit and loss account. Underneath are the most common ones we may find in a company's accounts.

Premises costs - Organisations have to pay

prompt bills are connected with premises from that which they operate: rent, rates, heating and lighting and insurance.

Rent - If the firm does not own the premises (property, site and area) prompt payments of rent should be made to the owner.

Rate - A local tax on property, the amount must be paid to the local authority and depends on the nature of firms, where it is located, what the organisation does and its size.

Heating and lighting - The bills of gas and electricity should be paid to the company supplying the service.

Insurance - promise of repayment in the case of loss; paid to people or companies so concerned about hazards that they have made prepayments to an insurance company.

Administration costs -These includes items such as telephone bills, postage, printing and stationery. But firms have staff cost as the biggest expense. Businesses wages and salaries to staff.

Wages - The money paid to hourly paid employees for the work done, usually based on the number of hours spent at the place of work. Wages employees are earning in some weeks, depending on how much work they do.

Salaries - A regular payment, usually monthly or weekly, made by an employer, under a contract of employment, to an employee.

Salaried employees it receive a set amount of money each week or month.

Selling and distribution costs - The costs linked with selling the goods or services that businesses produces. The most common of these are:

• Salaries - Paid to sales staff
• Carriage - The cost of delivering products
• Marketing - Advertising and promotion costs
• Finance costs - Many few firms can operate without a bank account, but there are further expenses
  

associated with having a bank account such as:

Individuals generally benefit from free banking, as long as the account does not go overdrawn, all transactions are free; but this is not always the case. There are bank charges for every firm's transaction and every cheque that the company writes, for each time cash is withdrawn, every cheque paid in, and every time cash and coins are paid in over the bank counter, as well as all standing orders and direct debits the bank pays for the business.

Overdraft, loan and mortgage interest - Every form of bank borrowing will also incur interest charges that must be paid. Good advice is to compare the various deals offered by banks as some will cost more than others.

Purchase of stock or raw materials - The firm that sells goods need stock to sell to customers and it is always a very large expense. When the business first starts up, most of the money for stock or raw materials will have to be made immediately, these are known as cash transactions or transaction costs (costs arising from such transactions as buying and selling). Because it is important for an accountant to understand these terms, it's just measuring and recording transactions of these businesses. Accounting will have some knowledge about financial accounting.

To ensure that this is done correctly considerable attention will be paid to accounting concepts and to any requirements of legislation.

The manufacturing organisations e.g. buy in raw materials and use them to make products for sale; whereas retail companies buy in finished goods for sale at a higher price. So

this is basic of their trade.

It will be easier to see this in action rather than try to imagine this, so here is the full trading account for Guy Roper who runs a business. From his records he has identified the following receipts and expenses that are relevant. Gross profit: The difference between the business total revenue and how much it cost to sell goods or buy products in. The Guy Roper has to think about these account first then will be much easier for him to calculate trading and P;L account and the less expenses can be done at any item when these first.

Finally the Gross Profit minus business overhead (less expenses) equals Net Profit. Profit and loss account: the profit and loss account follows on form the trading account and simply all of the expenses of a business from the gross profit; the resulting figure is the net profit. The continuing the example of Guy Roper, here is his trading and profit and loss account for the year ending 30th of September 2007.

From his records he identifies that he has had less expenses of ½195,845. These are shown towards the bottom of the profit and loss account, which is above trading and profit; loss account table shown.

Balance sheet: The balance sheet shows what the business is truly worth and what makes up its value. It starts with a comparison of the items of value within the business (its assets) and the money that it owes (its liabilities). The balance sheet is the last document in a set of final accounts and can be defined as an overview of his company financial position on

a particular showing its total assets and liabilities.

• Fixed assets: such as land and buildings etc
• Current assets: such as stocks and debtors etc
• Current liabilities: such as amounts owed to creditors and overdrafts etc
• Long term liabilities: such as mortgage etc3 - Include an explanation of each of the component parts within each final account.

The trading account is always laid out in the same way and gross profit is calculated as follow:Sales/turnover minus Sales returns equals Net sales minus Cost of goods sold equals gross profit.

Income: The amounts shown in his business such as Opening stock at the start of the year and then purchases of his materials in the year and finally his revenue was 308,500.

Expenses: There are the amounts that the business has had to pay out, such as rent, wages and many others. Note that 'drawings' (amounts that a trader takes from the business for their personal use) and the cost of fixed assets are not classed as an expense and do not appear in the profit and loss account.

Final Accounts

Within the following areas the Guy Roper should be able to: Trading and Profit and Loss Accounts

• calculate the gross and net profits or losses, based on accounting principles, for a specified period
• recognise that net profit (or loss) is the increase (or decrease) in the net value of assets during that perio
• prepare simple columnar

Trading

Accounts when dealing with a business which has some departments

Balance Sheets

• recognise that they are statements of balances of assets and liabilities on a specified date set out in any valid layout
• demonstrate knowledge of the meaning, importance and designation of fixed assets, goodwill, current assets,
  

current liabilities, long term liabilities and working capital

Profitability

These are two ratios show how much profit the firm makes compared with its size. The higher the number the greater the profit made.

1: Gross Profit: It shows how much profit the firm earns the cost of making the product. Gross profit = gross profit for year divide by sales for year then multiply by 1002: Net Profit: It shows how much profit is left after the entire firm's cost has been paid.

Problems with Cash flow of Valley Farms

Identifying cash flow problems before they happen can help to prevent disasters in business.Many business or organisation draw up forecasts and plans but then fail to study them properly and look out for any danger points, or compare the forecast with actual figures as they become available. The earlier Farms owner identifies the problems, the sooner they can take action to avoid them.In the Cash flow attached, there many problems.

Valley Farms offers 30 day credit however, their customers are slow to pay. Customers are slow to pay: If customers are slow always like this then Valley farms will be in problems.

Suppliers demand to be paid more quickly: From the cash flow attached, it looks

like valley Farms are paying their suppliers too quickly. For example, from the month of July, although the business operate on a 30 day credit scheme, it paid its suppliers ½4600 and this increased all the way to December and then again in April and May.

Problems within wages and drawings: Another problem I have identified in my cash flow forecast is that there are too much drawings going on.

Firstly Mrs Verdi is drawing ½2000 for herself every month. This is too much as it adds up to ½24000 at the end of the financial year. She is also paying 2 managers at the cost of ½4000 each month. The main problem is that the business is not doing very well and therefore any cash available needs to be used wisely in order to avoid huge debts.

Overheads /fixed assets too high: Valley Farms owner paid ½13000 on capital expenditure at the very first month. These were too high and eventually lead to a huge deficit at the end of the financial year, so this is the worse and serious problems for his firm.

Too much stock: Another problem within the cash flow is that there is too much stock being held by Valley farms. The business is not selling quickly enough to generate enough cash.

Too little capital: Also Mrs Veridi's capital was too small at the beginning of the year. She only had �25000 to start the business but spent �29900 on expenses; making her go overdraft at the very first month.

Bad debt: Due to the 30 day credit, there will be a bad debt of ½25000 at the end of the financial year. This will affect

Valley Farms badly as it may end up being declared as bad debts.