Lectures

Page 1

Lecture 1. Intro

Learning outcomes:

Branches of accounting

Main user groups of accounting information

Types of business organisations

Financial objectives of a business

1) What sort of financial information do I require if I am starting up a business?

Information about taxes; expenses on inventory and equipment, salaries.

I will require information....

2) What is Accounting?

Accounting is a language about financial information (which is measurable in terms of money) for a business.

Accounting is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information.

It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity.

3) What are 3 Branches of Accounting? (также написать пояснение к каждому)

Financial Accounting

Cost Accounting

Management Accounting

4) Who are users of financial information?

Internal: Managers, Employees and their representatives*

External: Customers, Investment analysts (от меня добавлю: investors), Owners, Lenders, Suppliers, Competitors, Governments, Community representatives

Why do each of the user gropus need accounting information relating to a business

http://accountingstudy.com/accounting-courses/financial-accounting-terms-dictionary/accounting-information-users.htm (про internal and external users с примерами)

5) What is the accounting information system? List 4 steps

Step 1: Information identification

Step 2: Information recording

Step 3: Information analysis

Step 4: Information reporting

6) Types of business organisations:

Sole trader

Partnership

Limited Company (Private)

Limited Company (Public)

What is the difference between these types of businesses?

How do you actually set up a business as a sole trader, partnership and a limited company?

7) What sort of decisions do managers make with management accounting information?

Allocation of resources

Developing long term plans

Performance evaluation and control

Determining costs and benefits

8) What are financial objectives of a business?

Maximise sales revenue (sell as many products/services)

Maximise profit (need to take into account selling price and expenses)

9) Can you think of any reasons why making the maximum profit may not be in the best interests of the business and those who are not involved with it?

Risk e.g. cutting out expenses such as research, development and training .

Maximising profit by using less superior raw materials could lead to customer dissatisfaction and loss of sales.

Short term benefits only – profits increase but other aspects of the business may be negatively impacted such as quality of product, levels of customer service.

10) You are is in the process of organising a musical event at a local school. What financial information do you need to collect in order to determine what price to charge customers?

Definitions:

ASSETS

LIABILITIES

CAPITAL

INCOME

EXPENSES

DRAWINGS

CAPITAL EXPENDITURE

REVENUE EXPENDITURE

Page 2

Lecture 2. Introduction to financial statements/definitions & concepts

Learning Objectives:

1) Introduction to Financial Statements

2) International financial reporting standards

- Changes in terminology

1) What are 3 main Financial Statements?

1.Income Statement (Trading and Profit and Loss Account/ P&L)

2.Statement of Financial Position (Balance Sheet)

3.Cash flow Statement

2) What are the sales?

3) What two sections are included in Income Statement?

Trading Section and Profit & Loss Section

4) What does the Trading Section calculate in Income Statement?

This calculates the Gross Profit using the following information for an ongoing business:

Sales

Opening stock, Purchases, Closing stock

Cost of sales = opening stock + purchases - closing stock (Formula)

Gross Profit = Sales – Cost of Sales (Formula)

5) What does the Profit & Loss Section calculate in Income Statement?

Add up all the business’ expenses , Deduct from Gross Profit then Equals Net Profit

Net Profit = Sales – Cost of Sales – Expenses (Formula)

Net Profit = Gross Profit – Expenses (Formula)

6) what is the ‘start of the accounting period’ or ‘the beginning of the financial year’? (Look n terminology slides)

7) What does the Statement of Financial Position?

Provides a snap shot summary of the business at a given point in time, usually the end of the financial year (not always Dec 31st)

Illustrates the:

Assets (what the business owns)

Liabilities (what is owed by the business)

It indicates how the business is funded and how these resources have been allocated.

8) How does the present the information?

Breaks down assets and liabilities under four headings:

Non-current Assets

Current Assets

Current Liabilities

Non-current Liabilities

Shows how the business is funded and loans taken out of the business:

Initial, start up funding – Capital also known as Opening Capital

Ongoing – Retained Profit or Net Profit

Drawings

9) What are assets?

Items that are owned by the organisation.

10) What 2 groups of assets exist?

Current Assets and Non-current Assets

11) What are non-current assets? (Provide examples)

Items that are permanent in nature & are normally used by an organisation over a number of years, such as:

Motor vehicles

Premises

Fixtures and fittings

Machinery

Office equipment

Patents and Copyrights

12) What are current assets? (provide examples)

Items that are short-term in nature. Used in the day to day running of an organisation, the value of which will change on a daily basis, such as:

•Stock

•Trade receivables – people /organisations who owe the business money

•Cash in hand

•Cash at bank

13) What are Liabilities?

These are any amounts owed by our organisation to a third party.

10) What 2 groups of assets exist?

Current Liabilities and Non-current Liabilities.

11) What do I need to know about non-current liabilities?

They are:

•Payable after more than 12 months i.e.

•Long-term loan

•Mortgage

12) What do I need to know about current liabilities?

Current liabilities

•Payable within the next 12 months such as:

•Trade payables – people / organisations which the business owes

•Bank loans due within 12 months

•Bank overdraft

13) What is the difference between Capital and Drawings?

Capital– Money into the business

Drawings– Money out of the business

Capital

•Amounts that the owner(s) pay into the organisation to start the business.

•In effect it is a long-term loan from the owner to the business.

•If the owner were to invest his funds in a bank he would receive a return on that investment in the form of interest.

•From a business this is known as profit sharing* or in public limited companies, as dividends.

* Note: In most businesses the owners receive a percentage of the profits and the balance is reinvested in the company. This is known as ‘retained profit’.

Drawings

•Amounts taken out of the business by the owners are known as drawings.

•Essentially a loan from the business to the owner or could be a repayment of capital invested.

•Drawings will include money taken out of a business as well as the monetary value of any goods or assets taken from a business by its owner(s).

•Drawings reduce an owners’ stake in their business.

14) What is the working capital?

Working capital is:

•Resources that a business has at its disposal on a day to day basis.

•Too much working capital may indicate an inefficient use of assets

•Too little may indicate problems paying debts as and when they fall due.

•Working capital should not be confused with ‘capital’.

Formula:

Working Capital = Current Assets – Current Liabilities

Terminology

PURCHASES – goods that have been bought for the business. E.g. For a cake and coffee shop it would be the cost of raw materials such as flour, butter, salt, cream, sugar and all ingredients that would be needed. Plus the cost of purchasing coffee beans, soft drinks and other items that are sold in the shop such as crisps and chocolates.

OPENING INVENTORY OR OPENING STOCK = OPENING INVENTORY AT START OF ACCOUNTING PERIOD

CLOSING INVENTORY or CLOSING STOCK = CLOSING INVENTORY OF GOODS AT END OF ACCOUNTING PERIOD

COST OF SALES are costs incurred directly in the making or buying in, of products.

COST OF SALES = OPENING INVENTORY AT START OF ACCOUNTING PERIOD + PURCHASES – CLOSING INVENTORY OF GOODS AT END OF ACCOUNTING PERIOD

Cost of sales = opening stock + purchases - closing stock

OVERHEADS - these are the other expenses that the business incurs. (накладные расходы)

Formulas:

Gross Profit = Sales – Cost of Sales

Gross Profit % = Gross Profit x 100%

Sales

Net Profit = Gross Profit less all other expenses

Net Profit % = Net Profit x 100%

Sales

Summary of key terms and concepts

ASSETS

Non-current assets

Current assets

LIABILITIES

Current liabilities

Non-current liabilities

WORKING CAPITAL

CAPITAL

INCOME

EXPENSES

DRAWINGS

•

REVENUE

SALES

INCOME

EXPENSES

PURCHASES

OPENING INVENTORY

CLOSING INVENTORY

STOCK

•

COST OF SALES

OVERHEADS

PROFIT

GROSS PROFIT

NET PROFIT

GROS PROFIT %

NET PROFIT %

Page 3

Lecture 3. The preparation of final accounts from the trial balance.

Learning objectives:

1) Understand the trial balance

2) To prepare final accounts

– Income statement

3) Depreciation

1) What is a trial balance?

A trial balance is a record of all account balances at a point in time, usually at the end of each financial year.

2) What does the Trial Balance do in accounting?

The trial balance lists each debit and credit side by side – both columns add up to be the same.

The trial balance provides a complete summary of a business:

(For Income Statement) (For Statement of Financial Position)

– Income - Assets

– Expenses - Liabilities

3) For what is the Trial Balance used?

The trial balance is used to prepare the final accounts:

– Income Statement

– Statement of Financial Position

4) What two columns does the Trial Balance comprise?

Debit side (left hand column)

Credit side (right hand column)

5) For what is left column created?

For Income Statement items

– All expenses are recorded on the debit side

For Position of Financial Statement items

– All assets (current and non-current) are recorded on the debit side

– Drawings are recorded on the debit side

6) For what is right column created?

Income Statement items

– All income is recorded on the credit side

For Position of Financial Statement items

– All liabilities (current and long term) are recorded on the credit side

– Capital is recorded on the credit side

7) What section in trial balance can switch between the debit (left) and credit (right) columns?

It is bank account.

If the bank appears in the same column as trade payables (Debit column) it is a current asset.

If the bank appears in the same column as trade payables (Credit column) it is a current liability (bank overdraft)

* You will notice also that the total of the debit column exactly equals the total of the credit column.

8) What do I need to do in order to produce the financial statements from my trial balance?

•Use every item in the trial balance once only, either in the Income Statement or the Statement of Financial Position

•Use each item shown in the notes to the trial balance twice

•Once in the Income Statement

and

•Once in the Statement of Financial Position

9) What is depreciation?

- Depreciation is a way in which we can spread the cost of a non-current asset over the accounting periods that benefit from its use.

Depreciation provides us with an estimate of the fall in value of a non-current asset during an accounting period.

It is an expense in the Income Statement

It is a process of apportioning the cost (or validation) of non-current assets.

10) What basic method of depreciation can you name?

Straight Line.

Equal Periodic amount (rationally distributed expense)

Example 1: The computer will give economic benefit for 4 years so the expense of £2000 is spread over these years on a rational basis- this is Straight-Line depreciation.

•The computer costs 2,000 and will be worth £250 (salvage value) at the end of its life.

•The result is £1750 (£2000 - £250).

•The useful economic life is the other part you need.

For the computer you might estimate 4 years of useful life.

•Divide the result you by the useful life figure, and you get the annual depreciation amount:

£1750/4 = £437.50

•This is the amount you write off each year.

Referred to as depreciation charge – treat as an expense in the P&L statement

Example 2

•A motor vehicle is purchased for £10,000.

•Depreciation is 25% - straight line method.

•Ist Year Depreciation charge is 25% of £10,000

= £2500

•Net Book Value is therefore £7500

11) How Depreciation charge is treated in the Income Statement?

The depreciation charge is treated as an expense in the Income Statement.

Page 4

Lecture 4. The preparation of final accounts from the trial balance

Learning Objectives:

1) To prepare the Statement of Financial Position from the trial balance

2) Re-cap on depreciation

3) Cost and Net Book Value

1) What does Depreciation represent?

Depreciation represents a decrease of the monetary value of an asset over time.

2) Why does this decrease happen?

The monetary value of an asset decreases over time due to use, wear and tear or obsolescence.

3) How in Income statement is recorded in the Income Statement?

The depreciation of an asset is recorded as an expense item in the Income Statement.

4) What is Net Book Value (NBV)?

- It is the value at which a company carries an asset on its balance sheet.

Net book value is equal to the cost of the asset minus accumulated depreciation. (NBV = asset cost - accumulated depreciation)

So, the depreciation amount is also recorded in the Statement of Financial Position.

5) How is the information allocated on the Statement of Financial Position?

Breaks down assets and liabilities under four headings:

Non-current Assets

Current Assets

Current Liabilities

Non-current Liabilities

Shows how the business is funded and loans taken out of the business:

Initial, start up funding – Capital also known as Opening Capital

Ongoing – Retained Profit or Net Profit

Drawings