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Business Accounts Notes

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Business Accounts Business Accounts Terms SH(s) = Shareholder(s) Capital = money contributed by the owners (i.e. money invested by SHs) and/or an accumulation of profits from previous accounting periods Income (individual)= Turnover (company) Expenses = regular expenditure by business Assets = items that provide long-term value for business, e.g. plant and machinery; asset can be re-sold to obtain cash Two types of assets:
? Fixed assets = Long term assets e.g. plant & machinery, premises
? Current assets = Short term assets e.g. stock, trade debtors
? Net assets:

Liabilities = debts of company
? Current liabilities = Debts due in less than one year Net profit = Turnover LESS Expenses Profitability percentage = Net profit/Turnover x 100
! see classification system below!
Gearing
? Compares the amount of finance borrowed with the amount of finance provided by the owners (equity v debt). The ratio measures the extent to which the company is financed by debt (LT liabilities) as compares to equity capital.
? Gearing identifies how risky an investment is in the ordinary shares of a company - amount of gearing = measure of risk
? General rule - the more highly geared a company, the greater the risk to ordinary shareholders:
? Ordinary SHs may not receive dividends if there is insufficient profit after the interest has been paid
? If the company is unable to pay its interest obligations and capital repayments as they fall due - the loan creditors may force the company into liquidation.
? HOWEVER - if the company is going well and it is highly geared = ordinary shareholders stand to reap disproportionate

?rewards [because of the increased profits generated by the borrowing]. A business relying too heavily on borrowed funds =
"overgeared". UK - the norm is low geared companies [more emphasis on short-term planning]

Double-Entry Book Keeping?Double entry bookkeeping is based on idea that every business transaction has two aspects to it. To give an accurate picture of the state of the business, both aspects need to be recorded. Each aspect must be recorded in a different account. The double entry bookkeeping requires the business to have a number of separate accounts, e.g. one for cash, one account for each time of asset, one for each type of expense, one for each person to whom the business owes money, one for each debtor that owes money to the business. So if you add something on one side, you need to delete something on the other side. In order to record the two aspects, accounts are divided into two sides, called ledgers.

Left ledger Expense incurred Asset acquired/increased Liability reduced/extinguished Cash gained?Right ledger Income earned Asset disposed of/reduced Liability incurred/increased Cash paid

Always include 'DR' or 'CR' after the number!
Don't forget, common mistake!
Debit (DR) is used as label for the left-hand side and credit (CR) for the right-hand side. Note, if something is a debit, do not put a minus ( - ) in front of the number but simply add the extension 'DR', e.g. 5 DR Credit is money business owes Debit is money owed to the business

Cash
? Cash received - DR
? Cash paid - CR When compiling accounts - do cash first, everything else will be in opposite ledger. Trial balance
? used to:
- Check accuracy of the bookkeeping

?

- As a preliminary to drawing up final accounts Add up all CRs and add up all DRs in all ledgers - should be same number at the end (normally 0)

What is a Profit and Loss Account?
Records income and expenses across a period of time (usually an accounting hear) What is a Balance Sheet?
Records
? Assets;
- remember distinction between 'fixed' and 'current' assets
? Liabilities; and
- remember distinction between 'current' and 'long-term' assets
? Capital on a given date What is a Trial Balance?
Credit and debit balances, All income and outcome of the businesses A Trial Balance forms the basis of information from which the financial statements - principally the Profit and Loss Account and Balance Sheet - are then compiled. Usually put together by a business or its accountants ALCIE Classification In bookkeeping, ledgers/accounts can be classified in different types. 5 principal types are:
? A ... Asset
? L ... Liability
? C ... Capital
? I ... Income
? E ... Expense Asset = something you OWN e.g. motor vehicles, cash at bank Liability = something you OWE e.g. loans, trade debts

Capital = usually identifiable as an injection of value from the owner or an investor rather than money accruing from customer or otherwise generated by business; represents who owns the business Income = income earned in the business; usually comes from regular sources; each main income source of the business will have a separate account e.g. a theatre might record income from ticket sales and from venue hire in separate accounts Expense = expense of running the business; each different type of expense is recorded in a separate account e.g. heating, lighting, telephone, postage bills Year-end adjustments In order to get a true picture of the company at a particular date, we need to correct certain numbers.
? Prepayments
? Accruals
? Bad debts
? Doubtful debts
? DepreciationPrepayment - having paid for a benefit but not enjoyed it yet. e.g. insurance premiums, business rates, rent If a prepayment adjustment is not made, the profits of the business will be artificially low - i.e. the accounts will not be giving a true reflection of the business.Dual effect of prepayment:
? Expense: the relevant expense account is reduced so that it records the correct amount of benefit (goods/services) actually used in the accounting period
? Asset: an asset account is created because the business had paid certain sums in advance and can therefore expect to receive the benefit in the next accounting period.Accruals - opposite of 'prepayment'. Enjoyed a benefit but not having paid for it yet. e.g. electricity costs, wages If an accrual adjustment is not made, the profit of the business will be shown as artificially high - i.e. the accounts will not be giving a true reflection of the business.

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