Accounting - budgeting ish
Two main financial statements
Income statement - performance
How the company has performed over the trading period
Balance sheet - financial position
Drawn up on the final day of the trading period
Lists the assets of the business against the claims (good news vs the bad),
balance sheet balances these two
Assets:
Probable future benefits - something that can give you a benefit in
the future
The business has an exclusive right to control the benefit - if the
asset cannot be controlled by the business, it is not considered an
asset as you can’t be sure it will always give you a benefit
The benefit must arise from a PAST transaction - you cannot use an
asset you don’t already have
Asset must be capable of measurement in monetary terms
Objective valuation - company can’t objectively value their own assets
Claims:
Obligation to provide cash, or some other benefit to an outside party
Liabilities - claims of outside parties (bank claiming loans back)
Equity - claims of the owners of the business
Capital - investment of the owner plus profit = equity
Balance sheet equation:
Assets = claims
Assets = liabilities + equity
Assets - liabilities = equity
Balance sheet will ALWAYS balance
Classification of assets:
NON CURRENT - assets are those held, not for resale but for use in
the business to help generate wealth (premises, plant and
machinery, computers) non current assets are categorized between
tangible assets, intangible assets and investments
CURRENT - held as part of the day to day trading activities of the
business (inventories, trade receivables, cash)
Liabilities:
NON CURRENT - amounts due to other parties which are not liable
for repayment within the next 12 months
CURRENT - amounts due within the next 12 months (trade payables)
, Equity:
Capital is the money which the owners originally invested in the
business
Retained profit is the profit made which has been reinvested in the
business
Income statement:
Performance statement
Measures how much profit the business has generated during the
trading period
Compares the revenue generated to the expenses incurred
If revenue is higher than expenses, the business has made an
operating profit
Revenue - income:
Manufacturer - sale of goods
Squash club - subscriptions, court fees
Songwriter - royalties, commission
Bus company - advertising, ticket sales
Expenses:
Cost of sold goods
Salaries and wages
Rent and rates
Insurance
Heat and light
Motor vehicle running costs
Printing and stationary
Bank interest
Income statement - nothing to do with cash
Profit has nothing to do with cash
Gross profit - key accounting ratio for manufacturing/retail companies
GP is the revenue generated
Net profit - belongs to the owner of the business and should be added to
their capital in the balance sheet
Realisation:
Revenue is recognized when the goods have been passed to the
customer or the service has been provided to the customer
Revenue is generated as soon as the service or goods have been
provided or passed to the customer
Matching/accruals:
Two main financial statements
Income statement - performance
How the company has performed over the trading period
Balance sheet - financial position
Drawn up on the final day of the trading period
Lists the assets of the business against the claims (good news vs the bad),
balance sheet balances these two
Assets:
Probable future benefits - something that can give you a benefit in
the future
The business has an exclusive right to control the benefit - if the
asset cannot be controlled by the business, it is not considered an
asset as you can’t be sure it will always give you a benefit
The benefit must arise from a PAST transaction - you cannot use an
asset you don’t already have
Asset must be capable of measurement in monetary terms
Objective valuation - company can’t objectively value their own assets
Claims:
Obligation to provide cash, or some other benefit to an outside party
Liabilities - claims of outside parties (bank claiming loans back)
Equity - claims of the owners of the business
Capital - investment of the owner plus profit = equity
Balance sheet equation:
Assets = claims
Assets = liabilities + equity
Assets - liabilities = equity
Balance sheet will ALWAYS balance
Classification of assets:
NON CURRENT - assets are those held, not for resale but for use in
the business to help generate wealth (premises, plant and
machinery, computers) non current assets are categorized between
tangible assets, intangible assets and investments
CURRENT - held as part of the day to day trading activities of the
business (inventories, trade receivables, cash)
Liabilities:
NON CURRENT - amounts due to other parties which are not liable
for repayment within the next 12 months
CURRENT - amounts due within the next 12 months (trade payables)
, Equity:
Capital is the money which the owners originally invested in the
business
Retained profit is the profit made which has been reinvested in the
business
Income statement:
Performance statement
Measures how much profit the business has generated during the
trading period
Compares the revenue generated to the expenses incurred
If revenue is higher than expenses, the business has made an
operating profit
Revenue - income:
Manufacturer - sale of goods
Squash club - subscriptions, court fees
Songwriter - royalties, commission
Bus company - advertising, ticket sales
Expenses:
Cost of sold goods
Salaries and wages
Rent and rates
Insurance
Heat and light
Motor vehicle running costs
Printing and stationary
Bank interest
Income statement - nothing to do with cash
Profit has nothing to do with cash
Gross profit - key accounting ratio for manufacturing/retail companies
GP is the revenue generated
Net profit - belongs to the owner of the business and should be added to
their capital in the balance sheet
Realisation:
Revenue is recognized when the goods have been passed to the
customer or the service has been provided to the customer
Revenue is generated as soon as the service or goods have been
provided or passed to the customer
Matching/accruals:
