PDF | Accounting is language of business. A language is meant to convey something, accounting also convey many things about business. statements and techniques that can mystify non-accounting colleagues. This new edition . specialist accountant, or team of accountants, is often appointed in. Accounting for Non-Accountants, 2E- The Fast and Easy Way to Learn the Basics .pdf. Haitham Reda. What Readers Are Saying About Accounting for.
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About this chapter Learning objectives Why this chapter is important for non- accountants Manufacturing accounts Service entity accounts Not-for-profit entity. Introducing Accounting to Non-Accountants. In This Chapter. ▷ Understanding the different needs for accounting. ▷ Making and enforcing accounting rules. Visit the Accounting for Non-Accounting Students, eighth edition .. Non- accountants are often puzzled why they are required to take a course.
Who are these users of accounting information and what decisions do they need to take? This usually occurs twice a year in the form of a profit and loss account and a balance sheet relating to the first halfyear and, later on, the full year.
Financial reporting 5 3. Management in companies range from director level down to supervisor level. Each person requires accounting information to help them in their role. Supervisors may be concerned with operating costs for a very small part of the undertaking.
Directors need to control the overall performance of the company and make strategic financing and investment decisions. Middle management need feedback on whether they are meeting their financial targets.
Suppliers need to assess the creditworthiness of potential and existing customers when setting the amount and period of credit allowed.
Customers also need to be reassured, in this case to minimize the risk of their supplies drying up and disrupting their own output. Firms entering into a joint venture will also need mutual reassurance.
Similar checks to those outlined above for suppliers will need to be carried out. This approach is outlined in Chapter Employees and their representatives have a vested interest in the financial health and future prospects of their employer.
They rely on an assessment of the published accounts by experts for this. Government levies tax on the profits earned by businesses and value added tax on the sales value of most industries. Tax authorities rely on the information provided by companies for these purposes.
Competitors can make some comparisons, for example, sales per employee, from published accounting data in a process known as benchmarking. This may provide clues to areas where performance may be improved particularly if explanations of differences in operating systems can be obtained.
Lenders need to be assured that their capital is safe and that the borrowing company can service the loan or overdraft adequately, so again the financial statements of profit and loss account and balance sheet will be examined from this viewpoint.
It can be concluded from the above that most users of accounting information are drawing on that provided in the published accounts. Only management have access to more detailed, non-published financial information within a company. Financial accounting is the preparation of financial statements summarizing past events, usually in the form of profit and loss accounts and balance sheets.
These historic statements are mainly of interest to outside parties such as investors, loan providers and suppliers. Management accounting is the provision of much more detailed information about current and future planned events to allow management to carry out their roles of planning, control and decision-making. Examples of management accounting information are product costs and cost data relevant to a particular decision, say, a choice between make or download.
Also included in management accounting is the preparation and monitoring of budgeted costs relating to a product, activity or service. All the above management accounting information is rarely, if ever, disclosed to outside parties.
Financial management covers the raising of finance and its deployment in the various resources needed by a business, in the most efficient way. The cost of capital is influenced by both the capital structure adopted as well as the riskiness of the investments undertaken. Part 3 is devoted to this theme. Within these three broad areas of accounting there may be further subsets of accounting relating either to one specific activity, or across the whole spectrum.
Treasury is a finance function usually only found in a very large company or group of companies. It embraces the management of Financial reporting 7 bank balances so as to raise the maximum interest on positive balances, or minimize the payment of interest on negative balances.
This might entail lending money overnight on the money markets. Also included here is the management of exchange risk where financial transactions are denominated in foreign currencies. Taxation in a small company will be included in the duties of the financial accountant who may need to call on outside professional advice from time to time. Corporation tax on company profits is not straightforward and the system of capital allowances can be complex for some large companies, groups of companies, or multinational companies.
Mention should also be made of the ramifications of value added tax VAT and the taxation of employee and director benefits in kind. A specialist accountant, or team of accountants, is often appointed in large companies to minimize the pain and maximize the gain from the various taxes and allowances affecting such organizations.
Audit is another accounting function mainly found in larger organizations. Internal auditors monitor that accounting procedures, documents and computerized transactions are carried out correctly.
Sales ledger The sales ledger sometimes also called the debtors ledger is a record of all sales made. Fixed asset register Fixed assets are those assets owned by your business for long-term use in the business and not intended for resale.
Having up-to-date. How often should these records be completed? While it varies from business to business. If record-keeping tasks are left uncompleted beyond the suggested timeframes. This will help ensure that your business does not run out of cash.
If this does happen. By taking just a few minutes each day or week to complete them it will seem a much easier task. Fixed assets form part of the balance sheet of your business We will discuss the balance sheet in more detail on pages 28— Regular completion of these important records will help ensure this does not happen.
They will also be invaluable if you ever have a visit from the tax authorities as they will go a long way towards demonstrating that you are a serious business person. The bank reconciliation involves adding up all the payments into and out of your business and comparing this to your business bank account statement. Example The following simple example illustrates the reconciliation process: The aim of this exercise is to ensure that the net total cash in or out is the same as the cash movements in your bank account.
Advantages w Bookkeeping can be a complex matter and a manually-created ledger system can be hard to understand for someone without any accounting training.
Computers and bookkeeping software have made the process much easier. Your bank manager is also likely to request these if you apply for an overdraft or loan. If the software you choose meets ATO requirements. The forecasting program can be used to factor these payments into your budget. The latter may want to check how your business is performing if you apply for a bank overdraft or loan.
Bookkeeping software can produce reports on debtors and creditors so you can see at a glance those people you need to chase up for payment and those you are due to pay. Many businesses waste money downloading surplus amounts of stock simply because they are unaware of how much stock they are holding. Once registered. To acquire stock you need to pay money for it. If you are not required to register for GST. It can be helpful to view stock on your shelves as piles of dollar notes.
If you input inaccurate information. Software can help you monitor and budget for your requirements ensuring your stock is always kept at the optimum level. This often concentrates the mind on keeping stock levels to a minimum! Disadvantages w As with any computer program. The two entries in your accounts are: Armed with this knowledge. Bookkeeping is a fundamental part of the accounting process. They are used to show how a business is performing.
This system accounts for every aspect of a transaction — where it came from and where it went to — in other words. This is called double-entry bookkeeping.
This is usually annually. The two initial entries in your accounts are: The general rule is that if an asset can be turned into cash within a period of 12 months it is called a current asset. If an asset is held over the longer term. In other words. Example 2 You carry out the same transaction as in Example 1. In due course. Generally these will be items such as debtors or stock.
Balance sheet The balance sheet is a snapshot of the assets and liabilities of your business at a given point in time. They may include monies owed to your suppliers called creditors or loans owed to other parties such as bank loans and hire download loans or monies owed to you such as funds you have invested in the business. The total of the assets of the business must always equal the total of the liabilities including the amount you have invested in the business.
The key thing to remember is that a balance sheet must always balance. This shows the movements of cash into and out of the business during the previous year. While it is only a forecast of what you expect to happen. It will also provide an early warning of any potential cash shortages. This is a vital management tool because it shows whether the business will have enough cash coming in to meet all the forecast cash payments it will need to make over the period. The expenditure items include: What does a profit and loss account look like?
You can see that it records the sales revenue of your business and the expenditure associated with the running of the business. Compiling the profit and loss account Where do I start? The starting point is to record the sales revenue for the period. This comprises either the value of invoices raised or the value of cash received, depending on whether you are using the accrual or cash accounting method of accounting see page Working down, the next item is cost of goods sold.
This item usually is only included if you are carrying stock as part of your business. For example, if your business is selling tyres, you would carry stocks of tyres.
If you simply supply services, for example, secretarial services, you are unlikely to carry stock for resale and therefore cost of goods sold will not apply. The formula for working out cost of goods sold is: This is because the labour is directly related to the manufacturing process.
Generally, you will only include labour in cost of goods sold if you are manufacturing something. You then list the expenditure you incur in running your business. Often there are so many individual expenditure items that it would be impractical to list every one individually.
Therefore it is acceptable to group these together under different categories.
Different periods of time are allocated for depreciating different assets. It is only the interest payment you show here, not the principal element of any repayment you make. Remember that you can only claim expenses which relate to the running of your business.
Any private element of items such as motor vehicle expenses cannot be claimed as an expense of the business. Gross profit percentage As you monitor the performance of your business. This saves you time trying to work out your forecast cost of goods sold. This can be calculated as follows: It is an extremely useful tool for managing your business.
The formula for breakeven is: Example You may decide to move to new premises where the rent is more than you are currently paying. Add the additional rent to the existing total expenditure for your business. You would therefore need to assess whether your business can achieve this increased sales level before deciding whether to move to the new premises. The items shown in the example are not exhaustive. These may include monies owing to your suppliers called creditors or loans owing to other parties such as bank loans and hire download loans.
Have a look at the example balance sheet page 58 for a better understanding of what a balance sheet looks like and the type of items it includes.
What is not included? What is included? The following items are included in the balance sheet of your business: This means that debt is funding around two-thirds of the business and the owner is funding the remaining one-third. Gearing Gearing indicates the amount of debt in a business relative to its assets. The general rule of thumb which applies is as follows: Useful ratios The following ratios can be generated from your balance sheet.
What does a balance sheet look like? You can see from the example balance sheet page 58 that the assets and liabilities of a business are listed separately.
It would therefore be classed as a noncurrent asset.
You will also see from the example balance sheet page 58 that assets and liabilities are divided into current and non-current. The totals of these are used in the formula for liquidity. This means that your current liabilities are covered 1. Liquid assets are those assets which can be turned into cash relatively quickly.
Liquidity Liquidity indicates the amount of liquid assets available to fund shortterm debt such as bank overdrafts and creditors. Current assets are shown at A and current liabilities are shown at D.
The formula for liquidity is: Current assets divided by current liabilities Look at the example balance sheet page You therefore have more than enough liquid assets to turn into cash should you need to pay all of your current liabilities in a hurry. Suppose you sell something to a customer and give them an invoice. This is a big mistake. Te r m s o f p a y m e n t Consider the terms of payment you offer to your customers. What is cash flow? If not managed appropriately.
Running out of cash is the prime reason why businesses fail. It is vital for the well-being of your business that you understand the difference. They mistakenly believe that they are one and the same thing. Hopefully you are now beginning to see why it is so important to deal only with those customers who are likely to pay you promptly. As we have seen. No amount of sales invoiced can replace actual cash received to help you pay your expenses.
We saw that after deducting business expenditure from sales revenue. If not then you may have to consider legal action for recovery of the money.
What is profit? Talk to your customer early about the non-payment to determine if it is just an oversight or if there is a problem. If one of your customers has not paid you in accordance with your agreed terms. It is not good business practice to offer extended payment terms to a customer just to get their business. Monitoring debtors You must monitor your debtors people who owe you money and creditors people you owe money to at all times.
Expenditure may include items which you have received invoices for. Communication is vital in the collection of outstanding debts but if it gets to a stage where. Cash is king It is worth noting at this stage a phrase which should be at the forefront of your mind at all times when you are running a business: While both are correct. It is vital that you ensure your customers pay you promptly because the longer the period between you selling them something and them actually paying you.
As already mentioned. In fact. This is because some of the expenses you will incur. This is sometimes called preparing a budget. An example annual budget is provided on page A timeframe of a year is a good starting place when preparing a budget.
Market research will be the key in determining the maximum price you can charge. Forecasting for a new business If you are setting up your business. To do this you will need to calculate what price you can sell your product or service for. This is called forecasting.
Price You should aim to sell your product or service for the maximum amount possible. Vo l u m e The next step is to consider how much of your product or service you can sell in a year. Once you have decided what your product or service will be. You will need to prepare a monthly budget once you have completed the annual budget. Ask people what they would be prepared to pay for your product or service and listen to their responses. It is thus easier at this stage to multiply everything out to a common month period.
Think of ways in which you may be able to increase the volumes you can sell. When preparing the budget do not forget to include a salary for yourself.
Running costs Once you have calculated how much of your product or service you can sell in a year. Try to be realistic when considering how much of your product or service you can sell. This will provide you with a good feel for the level of risk you are taking on. Successful business people will tell you that if you fail to plan. Even though your business may have been trading for some time. In addition. Be realistic in your budget and if possible over-estimate your expenditure and under-estimate your income a little so that you have a contingency built in should things not quite run in line with the budget.
Ten year long-term plan. One year short-term plan 2. This is a big mistake and is a contributory factor in many business failures. They recognise the importance of planning ahead. This will help you to keep focused on driving your business forward. Five year medium-term plan 3. They will almost certainly want to see a forecast for your business to reassure them that you can afford to repay the loan.
Three key forecasts Successful business people plan ahead. After all. The critical point is the time lag between downloading or manufacturing stock and actually receiving payment from your customers. You use this cash to download. If other businesses are moving forward. Businesses have the following operating cycle: Stock is then sold to your customers. That customer now has 30 days before they have to pay you. When payment is received from your customers you use that cash to download or manufacture more stock.
Forecasting cash flow As discussed earlier. You start with cash. A spreadsheet is an ideal vehicle for preparing a forecast because all the calculations are automatically performed by the computer program. The cycle starts over again. The forecast bank balance will be either positive or negative and any negative position has to be covered by either borrowing from a bank or family or by an injection of capital by you into the business.
Example 2 Business B receives day credit terms from its suppliers and offers day terms to its customers. It will thus be in a much stronger position cash-wise. In this instance. Example 1 Business A receives day credit terms from its suppliers and offers 90day terms to its customers.
If it downloads yet more stock from its suppliers. Forecasting the balance sheet If you are running a small business. Some accounting software packages contain forecasting programs which will help you forecast your balance sheet. Forecasting a balance sheet is a complex task and if you are requested to provide one then you should speak to your accountant.
General requirements The taxpayer company or individual must: Eligibility To be eligible to join the STS the following requirements must be met.
These factors have been taken into account by various courts and tribunals in the past and are thus a good benchmark against which to measure your business: The following factors provide general guidance on what constitutes operating a business for tax purposes.
As the name suggests. The main features of the system are discussed below. Of course. Carrying on a business As noted above. If it falls into any of these categories then it is unlikely to be classed as a business. Remember that you must review your eligibility for STS each year to ensure that your business continues to meet the above criteria.
If you decide to leave the STS. Is the activity of a size and scale consistent with similar businesses operating in the same industry? You would normally exit under the following two circumstances: Once you have joined the STS. Entry and exit If your business meets the above eligibility criteria and you choose to enter the STS. Is the activity regular or repeated?
Have you just carried out an isolated transaction or are you engaged in repeat or regular transactions with your customers. Is the activity carried out in a business-like manner? This involves keeping business records. If your activity is carried on for commercial reasons and in a commercially viable manner.
Is the activity similar to businesses already operating in that industry? If what you are doing is similar to what other businesses in the same industry are doing. Is there more than just an intention to run a business? You will need to demonstrate that you have done something tangible about starting a business.
You may need to demonstrate that the level of activity you are undertaking is similar to other businesses in the same industry. The value of a capital asset. It is not advantageous for a small business to leave the STS. For a full list of what assets are excluded and in what circumstances. Some assets are excluded from the above guidelines.
If you are in any doubt about what you can and cannot claim. Businesses are allowed to change the method of valuing stock they use each year. Stocktaking At the end of a trading year a business usually carries out a stocktake in which it counts up and values all its stock according to one of three methods: Depreciation is a complex matter.
Trading stock does not include the following: Under the STS. Gearing Even though we discussed gearing earlier. This means that it has a very high level of debt to fund. Gearing indicates the amount of debt in a business relative to its assets. Liquidity As discussed earlier in this Guide.
The formula for liquidity is as follows: In a small business. It is calculated as follows: Sales growth It is important to be able to measure the sales growth of your business from year to year for the following reasons. The formula for calculating sales growth is: