Topic 2 Key Business Functions � by 34G2ESH


									                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
inventory management.
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
accounting period.
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.
                         Financial Statements

There are three types of financial statements:

     Balance sheet
     Revenue statement (profit and loss)
     Cash flow statement

                                 Characteristics              Examples
                            Assets that are                 Cash at hand
                            converted into cash             Stock
              Current       within 12 months                Accounts
                                                            Pre-payments
  Assets                    Assets that the business        Cars
                            will maintain for a period      Fixtures and
                            of longer than 12 months         fittings
              Non Current                                   Intangibles
                                                            Property
                            Debts that need to be           Overdraft
                            paid within a 12 month          Accounts
              Current       period                           payable
                                                            Credit Card
Liabilities                                                 Tax payable
                                                            Accrued
                            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

ASSETS:                               LIABILITIES:
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

(less) COGS
(less) EXPENSES (listed)
(less) 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.

“Cash flow”
The movement of money in (through the register) and out (invoices) of the

Tells someone how much money they owe another

Credit note
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

Petty cash
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:

      Name
      Address
      Indication of what is being paid for (10 gerberas, 5 sunflowers)
      Order number
      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

Failure rate:
32% 1st year, 62% 3 years, 92% in 10 years
Financial reports allow businesses to track the success of a business and
record everything

Source documents:
Documents that record what happens in a business such as invoices, receipts,
and petty cash records

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