Topic 2 Key Business Functions –
Finance and Accounting
The role of accounting in a business:
Accounting is the process of recording details of all financial
transactions of a business.
Done through record keeping and the preparation and analysis of financial
statements for the owners and managers of business
Main financial statements:
A cash flow statement
A profit and loss statement/ revenue statement
A balance sheet
Assets: items of value owned by the business. They can be used to generate
Accounts receivable/ called debtors: are amounts owing to the business that
will eventually be received by the business for goods that were sold on
Inventory/stock: goods held by a business. Including, finished goods, work in
progress and inputs- raw material and components/ ‘[just in time \’ form of
Liabilities: debts owed to other businesses or individuals. E.g. montages
Accounts Payable/ called creditors: creditors are lenders to the business.
The business owes creditors money and should pay with in 20 days to
maintain good business relations.
Mortgage: a loan of money from a financial institution with interest, fixed or
variable. For a\land and buildings, 15-25 years.
Cost of Goods Sold /COGS: refers to the cost of stock sold within the
COGS = opening stock + purchases – closing stock
Gross Profit: sales less cost of goods sold. Gross profit is essentially a
measure of contributions or make up.
Net Profit: the financial ‘bottom line’. Net profit is the money that remains
once all expenses are deducted from revenues. Higher the net profit, the
Intangible Assets (e.g. goodwill): assets which have no physical dimensions.
Includes copyright, patents, trademarks… hard to value.
Depreciation: a fall in the value of assets overtime treated as an expense in
the revenue statement.
Prepaid expenses: goods and services that are paid for in advanced.
Goods and services that are paid for in advanced.
Accumulated Expenses: a build up of expenses (running costs) over time.
Bank Overdraft: a debt owing to the bank because the bank has authorized a
customer to with draw more than that customer has in there account.
Accounting: interpretation, recording and a\communication of financial
Finance: funds required by a business and used in its operations.
There are three types of financial statements:
Revenue statement (profit and loss)
Cash flow statement
Assets that are Cash at hand
converted into cash Stock
Current within 12 months Accounts
Assets Assets that the business Cars
will maintain for a period Fixtures and
of longer than 12 months fittings
Non Current Intangibles
Debts that need to be Overdraft
paid within a 12 month Accounts
Current period payable
Liabilities Tax payable
Debts that will be repaid Mortgage
Non-Current over a period of longer Bank loan
than 12 months Debentures
The amount owed by the Capital
Owner’s Non-Current business to its owners, Profits
Equity or the sum of claims in reinvested
the business by the Drawings
BALANCE SHEET: A snapshot of the businesses finances, it is a statement
of financial position
Current Assets (can be converted Current Liabilities (under a year)
to cash within a year)
Non-current Assets (+ 1 year) Non-current Liabilities (+ 1year)
Total Assets Total Liabilities
Total Assets Total Liabilities (liabilities and equity)
EQUITY = ASSETS – LIABILITIES
ASSETS = LIABILITES + EQUITY
REVENUE STATEMENT: presents a summary of a businesses financial
position at the end of a period, it lists the revenues and expenses for the
REVENUE – EXPENSES = PROFIT
OPENING STOCK + PURCHASES – CLOSING STOCK = COGS
(less) EXPENSES (listed)
NET PROFIT (GROSS PROFIT - EXPENSES)
NET PROFIT AFTER TAX
CASH FLOW STATEMENT: shows the liquidity of a business by comparing
cash inflows with cash outflows. Records cash transactions only.
Cash Inflows Cash Outflows
Cash sales Stock Payments (COGS)
Interest from investments Advertising
Dividends on shares Mortgage
CASH IN – CASH OUT = BALANCE
The Advantages of Good Financial Management:
Providing an overview of the business that enables someone to see how the
business is going from an educated position.
Why keep records?
To better manage the business and be able to see where money goes.
The movement of money in (through the register) and out (invoices) of the
Tells someone how much money they owe another
Used when damaged goods arrive and must be returned, the giving back of
money is delivered in the form of a credit note
Statement of account
A summary of all purchases, payments and returns
Cash that is left on hand for small purchases such as light bulbs
Are not listed on the statement of account as they are all directly debited
from a bank account NOTE: It is important to bank at different times of
the day due to safety reasons
A good invoice includes:
Indication of what is being paid for (10 gerberas, 5 sunflowers)
Date goods supplied
Detail and quantity of good supplied
Cost and total cost
Grand total of payment
Terms of payment (30 days to pay)
Many business fail
This may be due to inadequate funding, poor documentation and record
keeping of accounts
32% 1st year, 62% 3 years, 92% in 10 years
Financial reports allow businesses to track the success of a business and
Documents that record what happens in a business such as invoices, receipts,
and petty cash records