introduction to accountant

AS and A Level Business Studies

Introduction to Accounting

TASK – 1…………………………………..........page 1-4

TASK – 2………………………………………..page 5-7

TASK – 3………………………………………..page 8-9

TASK – 4………………………………………..page 10-12

TASK – 5………………………………………..page 13-14

TASK – 6………………………………………..page 15-23

TASK – 7………………………………………...page 24-32

TASK -8………………………………………….page 33-38

TASK – 9…………………………………………page 39-43

TASK – 10………………………………………..page 44-48

Bibliography And Sources I have used…………page 49

Task-1

Acknowledgement: I would like to be grateful to my teacher for helping me out in this assignment.

Introduction: For this assignment my aim to give advice to someone who is unsure about what is required and cannot see the purpose of maintaining accounting records. Basically, this person is one who does not understand the value of Account and its purpose.

What is an accounting?

An account is to be defined as the skills or practice of maintaining accounts and preparing reports. And the purpose is to aid financial control and Management of a business.

Book keeping: Book keeping is the process of recording in books of account or on computers the financial effects of business transactions. In bookkeeping, an accountant keeps a comprehensive record of how much your business owes creditors and how much is owed to you. The records of these transactions also indicate how much you have invested in equipment and inventory.

Why Accounting?

There are many reasons to keep accounts in business, which consists these certain points:

To record
To monitor
To control
To manage
To measure
To inform

The main features of Accounting

Recording Transaction
Monitoring activity and Controlling the business
Helping the management of the business
Informing the various stakeholders
Controlling the purse string
Planning for the feature
Comparing with past performance
Analysis and evaluation

Recording Transaction- Recording transactions includes documenting revenues (by invoices or sales receipts), and entering purchases (in the account payable account) and expenditures (in the check register). Using Office Accounting, the small business owner can move beyond daily recording to higher level accounting tasks, such as recording sales orders, tracking prospective customers, and projecting sales opportunities and cash flow.

Monitoring activity and controlling the business – All business need to know how they are performing throughout the year. If sales suddenly start to fall this trend needs to be quickly identified and remedial action taken. Business will also need to track how much they are spending on running the business. If these costs are steadily raising it is likely that profits will start to fall.

Helping the management of the business - Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions.

Analysis and evaluation - It is possible to evaluate the performance of the company, make comparison with competitors and keep a record of the firm’s progress over periods of time.

Financial Documents

An invoice- a document sent with goods sold on trade credit, informing the purchaser that the payment is due on a certain date.
A cash receipt- a proof of purchase given when something is paid in cash.
A credit note- a document issued to a purchaser when they have overpaid ,allowing ‘credit’ on future payments
Proof of delivery-proof the items have been delivered and received at a certain destination.

Financial transaction

Sales goods or services to customers
Debtors-customers who owe the business money for goods or services received on credits
Purchases- goods or services bought with the sole idea of resale
Creditors-the people or businesses that the business has purchased goods from on credit
Purchase of fixed assets-items that help the business to become more efficient
Expenses- items that need to be bought in order for the business to function

Book of Account – In order to record all of the above financial transactions a business will break its accounts books into four sections:

The sales ledgers contains the personal accounts of all the debtors (customers) who have received or services and have yet to play for them.
The purchase ledger contains the personal accounts of all the creditors-people the business has bought goods from and whom they will pay at a later date.
The general ledger keeps a record of the monetary value of sales, purchases, sales returns and purchase returns. It contains the accounts which record the amount of money that has been spent on the expenses of the business. The other main account that is held within the general ledger is the cash book. This is the account that records all the money that has come in and gone out of the business.
The journal records extraordinary items such as the start-up capital of a business and the purchase of a fixed assists. These are then posted to the general ledger in their own accounts. It is also used to record the correction of errors made in the double entry accounting.

People who involved in Accounting

Accountants- Accountants are responsibilities for supplying and using financial information. They are employed by businesses specialising in accountancy, or by a large firms which have their own financial department. They use the transactions recorded by these groups to produce final account.

Clerks- Billing and posting clerks and machine operators, commonly called billing clerks, compile records of charges for services rendered or goods sold, calculate and record the amounts of these services and goods, and prepare invoices to be mailed to customers. Billing clerks review purchase orders, sales tickets, hospital records, or charge slips to calculate the total amount due from a customer. They must take into account any applicable discounts, special rates, or credit terms. A billing clerk for a trucking company often needs to consult a rate book to determine shipping costs of machine parts, for example. A hospital’s billing clerk may need to contact an insurance company to determine what items will be reimbursed and for how much.

Auditing - Another function of these specialists is Auditing. Businesses which produce their own final accounts must by law have them checked for authenticity by an independent firm of accountants. This audit is performed annually.

Legal Requirements – Public limited companies are regulation by Companies Act 1985 and 1989 concerning the preparation and publication of financial statements. Companies are required to submit a copy of their account s annually to companies House. Companies with a turnover greater then £60,000 are also required to have their accounts independently audited.

Consequences of not keeping financial records - There are also negative consequences to a business if financial information to be inaccurate. These include:

Criminal action
Cash flow problems from a high fax bill or criminal action
Shareholders losing confidence and investing elsewhere
Bad public image
Change to management structure

Purposes and Considerations of Ratios and Ratio Analysis:-

Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.

Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, can be identify trends, good and bad, and adjust the business practices accordingly. Can also see how ratios stack up against other businesses, both in and out of the business.

Task-2

In task two my aim to explain the different between Capital expenditure and revenue expenditure; Capital income and revenue income

Capital Expenditure – are expenditures creating future benefits. Capital expenditure are used by a company to or physical such as , , or . In , a capital expenditure is added to an asset account. 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.

Included in such amounts is spending on:

acquiring fixed assets bringing them into business
legal costs of buying buildings
carriage inwards on machinery bought
Any other cost needed to make a fixed asset ready for use.

There two types Asset. They are:

Fixed asset
Current asset

Fixed asset: Fixed assets, as opposed to current asset are those assets with a remaining useful life of over a year. Following the accruals principal, these assets are shown on the balance sheet but their value is depreciated, and treated as an expense in the P & L ...

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Included in such amounts is spending on:

acquiring fixed assets bringing them into business
legal costs of buying buildings
carriage inwards on machinery bought
Any other cost needed to make a fixed asset ready for use.

There two types Asset. They are:

Fixed asset
Current asset

There are two types of fixed assets:

Tangible fixed assets
fixed assets

Tangible fixed assets include physical assets such as land and buildings and equipment. Long term financial investments are also considered tangible.

Current asset: Current assets are those assets that are expected to be used (sold or consumed) within a year, unlike fixed assets.

Revenue expenditure -The day-to-day running costs of a business (staff wages, purchase of trading stock, rent of business premises, and so on) are referred to as revenue expenditure

Premises cost e.g. rent, heating, and land and lighting etc.
Administrative costs e.g. telephone charges, postage, stationery, printing
Staff cost e.g. salaries, wages, training, staff insurance, pensions
Selling and distribution costs e.g. carriage on sales, marketing
Finance costs e.g. bank charges, loan and mortgage interest
Purchase of stock e.g. cash and credit transaction

Capital income - Any income resulting from the sale of capital investment assets.

Sole trader – a person who trades by himself/herself without the use of a company structure or partners and bears alone full responsibility for the actions of the business.
Loans- A fixed sum of money borrowed from a bank for a clearly defined period of time. The loan may be repaid in one lump sum, or by instalments
Shares – Shares is a term referred to the units of ownership interest provided to the stockholder or owner of a company. The term is often used in connection with the number of units issued to an owner of Common Stock or Preferred Stock. There is two types of shareholders:

Preference shares: Shares with a fixed dividend. The holders of preference shares are entitled to their dividend before ordinary shareholders and rank above ordinary shareholders should the company be wound up. Preference shares are share capital but not equity share capital.
Ordinary shares: Shares which are the risk capital of the business, also known as equity. The holders are part owners of the company and are entitled to share in any profits made.

Mortgages – A contract between a borrower and a lender where the lender guarantees payments until the debt is repaid.
Partners – A partnership is a type of in which partners share with each other the profits or losses of the business undertaking in which all have invested

Liability: An amount owed; an obligation of a company or entity that settled in the future by transfer of assets, provision of services, or assignment of future economic benefit, it is the result of a past transaction.

Liabilities are reported on a balance sheet and are usually divided into two categories:

Current liabilities — these liabilities are reasonably expected to be liquidated within a year. They usually include payables such as wages, accounts, taxes, and accounts payables etc.

Long-term liabilities — these liabilities are reasonably expected not to be liquidated within a year. They usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

Formula: ASSEST=CAPITAL+LIABILTIES

Fixed assets + current asset

Example: Assets =£ 25000

Capital=?

Liabilities= £38000

Capital = Assets – liabilities

= £ 25000-£38000

= £212000

Revenue Income – Revenue income is the income of a business which is derived from the normal trading activities of that business. Income is mainly derived from sale of the business’s product or service but other incomer can be derived from rent receivable, interest on investments etc.

Rent received: means when you rent your property and received capital for lend your property. This is one of the revenue incomes.
Commission received: commission is another type of income for selling a product. For example sale assistant selling a car, will received a percentage of actual amount of which the car sold.
Sales (cash and credit transaction): with currency sales you will received a receipt, which is a legal documents and credit sale is when you give credit to consumer.

Gross profit: Gross profit is a basic measure of the profitability of the business and it shows the return a business can make from making and selling its products.

Gross Profit = Revenue – Cost of Goods.

Net profit: Net profit is gross profit minus other, overhead costs. These costs are indirect costs of production such as bills, transportation, wages, interest payments etc.

Net profit =Gross Profit – Expenses

Task – 6

In this task my aim to explain her component parts (section) of a trading and profit and loss account and balance sheet.

Purpose and use of trading profit and loss account and balance sheet

Purpose and use of trading account - The trading account shows the gross profit (or loss) that the company has made. Profit is the money made by the business and equals income minus expenses.

Profit and loss account – The profit and loss account is an extension of the trading account. The profit and loss account shows the net profit (or loss) made. The Trading account and profit and loss account are often combined as one trading and profit and loss account so that both the gross and net profit can be displayed in the same set of accounts.

The purpose of the profit and loss account is to:

Show whether a business has made a PROFIT or LOSS over a financial year.
Describe how the profit or loss arose – e.g. categorizing costs between “cost of sales” and operating costs.

Purpose and use of balance sheet – The Balance Sheet is a statement showing the assets, liabilities and owner's capital of a business at a particular moment in time, for example the year end.

The purpose of a Balance Sheet is to report the financial position of a company at a certain point in time. Balance Sheet analysis also provides management with insights into income trends, debt standing and long-term financial consistency, all of which are crucial towards planning and execution of vital business policies. Balance sheet also functions as an indicator to the amount of debt that can be lent to the organization.

The cost of goods sold section of the trading account

The price of buying or making an item held for resale after being adjusted by beginning and ending inventory balances

Formula: -

Opening Stock + Purchases + Carriage Inwards – Purchases Return – Closing Stock = Cost Of Sales

Example: -

Opening stock = £8,550

Purchases = £345,700

Carriage Inwards = £328,160

Purchases return = £3,420

Closing stock = £23,850

Cost of sales =?

Opening Stock + Purchases + Carriage Inwards – Purchases Return – Closing Stock = Cost Of Sales

= £8,550 + £345,700 + £328,160 - £3,420 - £23,850 = £328,160

The calculation of Gross profit

Gross profit is the amount of profit available after deducting from sales the direct (variable) costs of labour and materials, plus the applicable costs of the factory overheads applied to the production of goods and services.

Formula: -

Net Turnover – Cost of Sales = Gross Profit + Commission Received + Discount Received + Rent Received

An explanation of the kinds of income such as: -

Discount received; rent received; commission received that should be added to gross profit

Discount Received means this discount is received from your creditors or suppliers at the time of the settlement of their account

Commission Received is another type of revenue income, a payment made to an intermediary, often calculated as a percentage of the value of goods or services provided. Commission is most often paid to sales staff, brokers, or agents.

Rent Received means a person renting his/her property gets money from the person(s) renting the property, this could also be called revenue income.

These three incomes reduce the cost of sales so, that’s why they are added to Gross Profit.

The Overheads/ Expenses section in the profit and loss account

Expenses mean an outgoing payment made by a business or individual. Here is a list of examples of expenses in a business: - wages/ salaries, insurance, rent and rates, electricity and heating, carriage outwards, water, depreciations, telephone bills, administration cost, petrol, bad debts, discount allowed, sundry expenses, general repairs, advertising and interest on loans.

The calculation of net profit

The Net Profit- This is calculated in the Profit and Loss Account and is what remains after all other costs used up in the period have been deducted from the Gross Profit.

Net profit =Gross Profit – Expenses

Trail Balance sheet

Café Bleau

Trail Balance sheet

Jane Water

Café Blue

Trading Profit and Loss Account year entering 31st Dec 2006 Café Blue

Looking at trading Profit and Loss of Café Bleu, the Café made Net profit which is £12240.As far as my opinion I think it is a successful business because this business made positive result so far. They could make more profit however; they may consider Salaries which is bit high. Also they may consider keeping their sales more competitive to their purchase.

Jane Water

Trading Profit and Loss Account year entering 31st Dec 2006 Jane Winter

Looking at trading Profit and Loss of Jin Winter, I think it is a not a successful business because of negative result which is net Loss £-74200 so far. In my opinion if the business results continue end up with the negative result, business may shut down within days or months.

Z man production Ltd

Trading, Profit and Loss account for year ending 31st December 2006

Analysis of Trading, profit and loss Account of Z man Production

Looking at trading, Profit and Loss of z man Production Ltd Company, it’s a successful company. However the company could make more profit by considering the following:

Sales – They could sell more by reducing their product cost or raise their product cost in certain amount. The company should beware that it may effect on customer, if they rise too much.

Purchase – They could consider purchasing fewer products or goods because in view of their amount of sales, purchase is higher.

Petrol - The Company spend far more money on petrol; however they should aim to spend less amount of money on their petrol cost to raise their profit.

Wages - Wages is one of the things which company could consider about it. Wages are bit higher then it should be. For example instead of £75900, if wages were £ 50000, then they could save £25000.

Looking at Trading, Profit and Loss of Timberlake Wholesalers Ltd Company, it’s a successful company. The company made profit £42,850, which is good proves that it’s a fairly successful company; however if the company have five or six shareholders means every shareholder would get less profit between them, but if the company have one share holder that would be alright. They could make more profit by considering selling more product or goods and increase their products prices. By making product or goods prices high would collapse in their business, so they should beware of it. They also may beware of the competitors when they are making price high for their products or goods. For my opinion they should consider make price high because their amount of their purchases.

Again looking at the company’s less expenses the salaries are too high comparing to their net profit. They may consider employing less employee or less salaries to increase profit and they can cut down their electricity/gas bills apparently its bit high. The amount of rant and rates are ok because they are not elevated.

Task 7

In this task my aim to explain my friends each of the element of a balance sheet:

Fixed assets
Intangible assets
Current assets
Current liabilities
Working capital
Long term liabilities
Net assets
Capital employed
A description of how to tell if the accounts balance.

Fixed assets – are those that will be used within the business and have a life expectancy of more than one year.

Intangible assets - is an asset that lacks physical substance and usually has a high degree of uncertainty concerning their future benefits, and they are unable to be touched (they are not physical objects). Patens, copyrights franchises, and goodwill are all examples of intangible assets.
Current assets - can be turned quickly into cash and are considered to be the ‘life blood’ of a business.

Current liabilities - is the debts of the business which must be repaid within one year. These usually consist of creditors- suppliers that have sold goods or services to the business on credit.

Working capital – is calculated by taking current liabilities away from current assets. It represents the amount of money that a business has available to spend after meeting all its immediate debts. A negative figure here could indicate that the business may be facing liquidly problems.

Long term liabilities – consist of the business debts which will be paid over a period of longer than one year. They will include bank loans which have been taken out over a number of years.

Net assets – are the total value of the assets less current liabilities.

Capital employed - is the value of money that has been left in the business after net profit has been added and drawing deducted. The Capital employed of one the year becomes the opening capital of the next year.

A description of how to tell if the accounts balance

If net assets are equal to capital employed in the end of balance sheet, then the account is balance. If not then the balance sheet would probably wrong or trading, profit and loss account which done previously, would been calculated mistakenly.

The balance sheet of Timberlake Wholesalers For Year Ended 31st Dec 04

Balance sheet of Z man Production LTD, year ended 31st march 2003

Balance sheet of A-Z Engineering Supplies, year ended 31st march 2003

Task-8

For this task I will need to have access to some past and present final accounts. As part of my report to my friend, I will need to perform ratio analysis to measure the:

Profitability ratio
Liquidity ratio and
Efficiency of her business in order to help her understand her financial situation.

Task-9

In this task I will be using suitable ratios from the previous task analysis the performance of the business which is J -Mitchell.

A ratio: Is the mathematical relationship between two quantities in the form of a fraction or percentage. There also relationships that can be measured in time periods and one 2 one situations.

Ratio analysis: is essentially concerned with the calculation of relationships which after proper identification and interpretation may provide information about the operations and state of affairs of a business enterprise.

The analysis is used to provide indicators of past performance in terms of critical success factors of a business. This assistance in decision-making reduces reliance on guesswork and intuition and establishes a basis for sound judgement.

Purposes and Considerations of Ratios and Ratio Analysis:-

Significance of Using Ratios
the significance of a ratio can only truly be appreciated when:

It is compared with other ratios in the same set of financial statements.
It is compared with the same ratio in previous financial statements (trend analysis).
It is compared with a standard of performance (industry average). Such a standard may be either the ratio which represents the typical performance of the trade or industry, or the ratio which represents the target set by management as desirable for the business.

Profitability Ratios - Closely linked with income ratios are profitability ratios, which shed light upon the overall effectiveness of management regarding the returns generated on sales and investment.

Gross Profit Margin-The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea and it tells us how much gross profit per £1 of turnover our business is earning.

Net Profit Margin- The profit margin tells you how much profit a company makes for every £1 it generates in revenue.

Return on Capital Employed- ratio also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets. It is expressed in the form of a percentage, and the higher the percentage, the better

Liquidity Ratios - While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important to financial managers who must meet obligations to suppliers of credit and various government agencies. A complete liquidity ratio analysis can help uncover weaknesses in the financial position of your business.

Working Capital Ratio-This ratio indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets.

Assets utilisation- Assets utilisation is measured how effectively you manage and control the current aspects of your business.

Stock turnover ratio - the stock turnover ratio shows how many times over the business has sold the value of its stocks during the year. The result of this ratio gives the "number of days that on average money is tied up in stocks". The longer this is, obviously the worse this is for the business as the money is not available to be used elsewhere.

Debtor’s collection period’s ratio- The debtor’s collection shows how days on average debtors take for pay for good sold to them by the business. The average collection period measures the quality of debtors since it indicates the speed of their collection.

The shorter the average collection period, the better the quality of debtors, as a short collection period implies the prompt payment by debtors.
The average collection period should be compared against the firm’s credit terms and policy to judge its credit and collection efficiency.
An excessively long collection period implies a very liberal and inefficient credit and collection performance.
The delay in collection of cash impairs the firm’s liquidity. On the other hand, too low a collection period is not necessarily favourable, rather it may indicate a very restrictive credit and collection policy which may curtail sales and hence adversely affect profit.

Creditor’s payment periods ratio- is collection is opposite to the debtor’s collection. This ration shows the speed the take to pay the creditors.

J-Mitchell Ltd Company

Ratio Analysis year 2006 and 2007

Profitability Ratios

Gross Profit Margin – After looking at J-Mitchell LTD company, I can assure that the company did well good because In year 2006 the gross profit margin was 31.1% and in year 2007 the gross profit margin is 37.4%.Comparing to year 2006 and 2007, it’s look like company doing well because gross profit were raised in 2007 by more then 5%.Meanwhile y in year 2006 the net turnover was £791100 and in year 2007 the net turnover is £919970, which is healthy position for company.

Profit Margin- looking back at j- Mitchell Ltd 2006, I can say that the company haven’t done well in year 2006 which is 9.3% and as well as 2007 which is 16.5% comparing to gross profit margin. Although In 2007 J- Mitchell Ltd company did well then they did in year 2006.However it could be raise more by looking back to trading, profit and loss account in year 2007.there are certain things that could be improved for example Bad Debt. To save from bad debt the company should check the reference, past bank statement before they lend money to other peoples, so it can be checked whether they can repay the money on time. Also In year 2007 J-Mitchell company had too high expenses for example petrol in year 2006 J-Mitchell they spent £22455 and in year 2007 they spent £25460.If J- Mitchell Ltd company wants improve their gross profit they may have to consider reduce their petrol expenses as well as other expenses for example-wages, bad debt etc.

Overall I think in year 2007 J-Mitchell Ltd Company did well compare to year 2006 and in the future the company could be successful if they keep their expenses low for example wages, petrol, insurance etc.

Return on capital employed- In 2006 J-Mitchell Ltd company were very good position which was 64.8% unlikely in year 2007 their revenue 0.6% which is not healthy for company or shareholders. This is an unusual because they haven’t kept good record of their transaction. I think the figure I have received are not accurate and also I’ve received only two years account information. So I am not sure whether the business would do good or bad unless I have received more past accounting information.

Liquidity ratio

Working Capital Ratio – in year 2007, the working capital ratio looks reasonable healthy; current assets are nearly three times as much as current liabilities (3.4:1), so the firm should not have too much difficulty meeting debts that need to be paid in the short times .Whereas in year 2006, the working capital ratio also looked reasonable because the current assets was nearly twice times as much as current liabilities (1.5:1).In 2007, the business has too much current assets, which is too good for company .

Liquid capital ratio- the liquid capital ratio also shows a good picture. Even with stocks taken out of the current assets the firm still have sufficient liquid assets to cover its bills, so it seems to be in a liquid position. In year 2006 the liquid capital ratio was (1.7:1) and year 2007 the liquid capital ratio is (4.3:1) which healthy for company.

Assets utilisation

Stock turnover ratio –Looking at J-Mitchell Ltd Company 2006, every 13 days to sell stock seems not long time but this is a manufacturing company and short turnover periods are not rare. Comparing to year 2007, year 2007 was good because in year 2007 every 10 days to sell stock which is quite short time. That means if the company carry on like this they may end up with more profits.

Debtor’s collection period’s ratio – Debtors collection periods of J-Mitchell LTD company is good enough however; Debtors are not taking long times to pay their bills in year 2007 then year 2006.In year 2006 debtors took 13 days to pay their bills but in year 2007 debtors took 20 days to pay their bills. Usually debtors gets 30 days to pay back but in this company debtors haven’t took the much long time to pay their bills.

Creditor’s collection ratio – in year 2006 and year 2007, an average of 20 days to pay bills suggests that the company has either negotiated good credit terms with suppliers or is struggling to pay bills.

Ziaul Haque