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Adrienne Gallagher Notes

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Lecturer: Adrienne Gallagher

Lecturer: Adrienne Gallagher

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Adrienne Gallagher Notes Adrienne Gallagher Notes Presentation Transcript

  • Introduction To Accounting
    • Accountants –Types of Accountants/qualifications
    • ACA, ACCA, ACMA, CPA, AAT, IATA
    • What is it all about?
    • Accounting is sets of figures about resources.
    • For a business:
    • What have they got
    • What they used to have
    • The change in what they have got
    • What they may have in the future
  • Users of Accounting information:
    • Equity Investor Groups (existing and potential shareholders)
    • Loan creditor groups
    • Employees
    • Analyst adviser (e.g. stockbrokers)
    • Business contacts – competitors, creditors, customers
    • Government (e.g. revenue)
    • Public (e.g. consumer and environmental groups)
  • Attributes of Useful Accounting Information:
    • Relevant to the user
    • Understandability
    • Reliability (checked by auditors)
    • Complete (gives total picture)
    • Objective (unbiased)
    • Timeliness
    • Comparability (from year to year and from business to business)
  • Double Entry Book-keeping
    • Double Entry Book-keeping - System is based on the simple idea that for every transaction there is a double action – a giving and a receiving
    • For example if we purchase a car by cheque
    • ·         Car is received
    • ·         Money is given
    • Each transaction is recorded twice
    •   -     once on the debit side
    • And again on the credit side of the corresponding account
  • Layout of an account
    • Account ____________
    • Debit Side | Credit Side
    •  
    • (Often referred to a T- account)
  • Detailed Layout of an Account
    • Account Name
    • -------------------------------------------------------
    • Date | Details | f | € | Date| Details | f | €
    • Date: Date of entry
    • Details: Name of corresponding account
    • F: Reference code, where other information is held
    • € : Amount of money involved in transaction
  • There Are 4 Types of Accounts
    • Expense accounts:
    • Record the cost of goods and services used by the business (e.g. purchases, rent)
    •  
    • Income accounts:
    • Record the earnings of the business (e.g. sales)
    •  
    • Asset Accounts:
    • Record what is owned by the business
    •  
    • Liability Accounts:
    • Record what is owed by the business, including to the owner (capital)
    •  
  • Ledgers and Accounts
    • To debit an account – an entry is recorded on the left hand side
    • To credit an account – an entry is recorded on the right hand side
    • The accounts are kept in a book called a ledger .
    •  
  • Useful Definitions
    • Book-keeping - recording financial information
    • Accounting (financial)
      • Uses information from book-keeping records to prepare financial statements
  • Useful Definitions
    • Financial statements
      • - The profit and loss account and the balance sheet
    • Cost accounting
      • How much does something cost to produce
    • Management accounting
      • Uses cost accounting to forecast, control and evaluate costs
  • Business Organisations
    • Types of business
    • Private
      • Sole traders, partnerships, companies, clubs
    • Public sector
      • Government bodies and nationalised industries
  • Sole Trader
    • One-man business unit
    • Capital is raised by the private resources of one person
    • May also include borrowings
    • Personally liable for all debts
  • Parternerships
    • Anything from 2 to 20 partners
    • Each partner contributing private resources
    • May also include borrowings
    • Personally liable for all debts of business
    • Subject to partnership agreement
  • Limited Companies
    • 2 types – private (LTD) or public (PLC)
    • Limited companies have limited liability.
    • This means that in the event of a companies collapse, shareholders are protected against the debts of a company. They may lose their paid-up capital, but nothing more. This is not the case for sole-traders or partnerships.
  • Private Limited Company (LTD)
    • No restriction to number of shareholders
    • But can only sell shares privately (without advertising)
    • This in itself will limit the number of shareholders
    • Generally see shares of limited companies being sold within boundaries of families,friends and business acquaintances
  • Public Limited Companies (PLC)
    • Can issue a prospectus (invitation to the public to buy its shares)
    • Shareholders then become part-owners of their companies.
    • They receive dividends from company profits
    • Shares may increase or decrease in value
  • Sources of Finance
    • Owners capital
    • Loan capital
    • Debentures
    • Profits
    • Leasing/ hiring of fixed assets
    • Creditors
    • Government
  • Owners Capital
    • Resources put into the business by the owner
    • Limited companies have shareholders
    • For PLC – authorised capital – how much it can raise
  • Owners Capital
    • The shares issued and purchased by shareholders are known as issued and paid-up capital
    • This may be less than or equal to the authorised capital
  • Classes of Shares
    • 2 types of shares ordinary and preferential
    • Ordinary shares: most common, often referred to as equity.
    • Directors decide what is paid out as dividends and how much they want to keep in the company.
    • Interim and final dividends
    • Ordinary shareholders paid last!
  • Preferential Shares
    • Fixed rate of dividend (e.G 10% preferential shares)
    • Cumulative preference shares – allows arrears of dividends to be paid
    • Participating preference shares – may allow an additional bonus (if ordinary dividend is higher)
  • Rights Issue
    • Where existing shareholders are invited to buy the new issue first – being offered in proportion to their existing shareholding
    • Generally offered at a favourable price
  • Loan Capital
    • Loans – short–term (less than 1 year), medium-term (2 to 5 years), long-term (up to 20 years)
    • Short-term – generally used for day to day running of a business (eg. Overdraft)
    • Medium and long-term – purchase machinery, buildings, etc
    • Generally provided by banks
  • Debenture Issues
    • Debentures are loan capital - issued by companies for the purpose of financing over a specific period of time (e.G 5 or 10 years)
    • Interest is then paid to the debenture holder at a fixed percentage of the nominal value of the stock even if no profits are made
    • Normally secured against assets of company
  • Debenture Issues
    • Debentures are sold in blocks of €100 and this amount is repaid to debenture holder when the debenture matures
    • Debentures can also be sold on the stock exchange
    • Value is not determined by the future profts of the company but of interest rates available elsewhere
  • Profits
    • Profits can be ploughed back into the business to finance future financial needs
    • Companies who retain their profits can transfer them to what is known as a P and L reserve, that is to leave it to accumulate in the profit and loss account
  • Leasing/ Hiring Fixed Assets
    • Hire purchase: expensive form of credit. Asset only becomes legal property of the business when last payment is made.
    • Leases – 2 types – operating and finance
    • Operating lease – merely a form a rental. Rental amount deducted from profts
    • Finance lease – depreciation and interest charges can be written off against profits
  • Factor Finance
    • Pass all trade debts to a factoring company who pay the company a major percentage of the debts immediately and the balance when the debts are collected. (Done for cash flow purposes)
  • Factor Finance
    • Factoring company charges interest on the sum advanced until the debts are paid plus an administration fee for the service
    • ‘ Without recourse’ – often factoring company bears any loss as a result of bad debts
  • Creditors
    • Important source of short-term finance
    • Credit facilities granted to a company are effectively an interest free loan
    • Short-term – generally 30 days
  • Governement Funds
    • Offer financial support in the form of grants
    • Example, fingal county enterprise board, IDA
  • Role of Accountant
    • Collecting & recording financial data
    • Organisation of this data into books
    • Control of cash resources
    • Preparation of financial statements
    • Assessment of financial performance
    • Role of auditor
    • Preparation of budgets
  • Role of Accountant
    • Preparation of costing estimates
    • Preparation of cash flow
    • Negotiations with banks/ other sources of capital
    • Role of financial advisor/ consultant
  • Accounts Office
    • Typical roles
    • Sales ledger – recording customers records
    • Purchase ledger –suppliers (accounts payable)
    • Cashier – bank statements/ recomciliations
    • Payroll – PAYE, etc
    • Credit controller – outstanding debts
  • The Auditor
    • Independent assessment of accounts by accounting professional
    • The purpose is to ensure financial statements give a TRUE and FAIR VIEW
    • Audtors report produced – for PLC included in annual report
    • Can ‘qualify’ a report if not satisfied with accounts or there is insufficient information available to him
  • Introduction to Financial Statements
    • Trading Account
    • Sales €500
    • Less Cost of Sales:
    • Purchases €100
    • Opening Stock €50
    • € 150
    • Less Closing Stock ( €20) ( €130)
    • GROSS PROFIT €370
  • Trading Account
    • Sales
    • Less sales returns
    • Purchases
    • Less purchases returns
    • Less drawings
  • Trading Account
    • Only other amounts that need to be taken into the trading account are:
    • Carriage inwards
    • Customs duties
    • Import duties
  • Trading Account
    • Sales (less returns €20) €480
    • Less cost of sales:
    • Opening stock €100
    • Purchases €100
    • Less returns (€25) €75
    • Add carriage-in €20
    • Add import duties €10
    • € 205
    • Less closing stock €105 €100
    • Gross profit €380
  • Trading Account
    • Always trading account for year ended ….. eg. 31/12/2005
  • Profit and Loss Account
    • Gross profit (from trading account)
    • Add income
    • Less expenses
    • = Net profit
  • Income
    • Money received by the business
    • Discount received
    • Dividends received
    • Interest received
    • Rent received
  • Expenses
    • Wages
    • Rent
    • Rates
    • Light and heat
    • Advertising
    • Discount allowed
    • Carriage outwards
  • The Balance Sheet
    • Statement of assets, liabilities and capital as at a particular date
    • Comprises of:
    • Fixed assets
    • Current assets
    • Capital
    • Long-term libilities
    • Current liabilities
  • Fixed Assets
    • Assets which are permanent in nature
    • Vital to the operation of the business
    • Generally last longer than 1 year
    • Examples
        • Land
        • Buildings
        • Machinery
        • Motor vehicles
  • Current Assets
    • Assets which are temporary in nature. The amounts change frequently
    • Examples
        • Stock (closing stock)
        • Debtors
        • Bank
        • Cash
  • Capital
    • Total investment by the owner in this business
    • Made up of capital plus net profit (or minus net loss)
  • Long-term Liabilities
    • Debts due by the business
    • Repayable at a date that is more than one year from the date of the balance sheet
    • Example
        • Mortgage
        • Five year loan
  • Balance Sheet Layout
    • Fixed Assets 500
    • Current Assets 200
    • Less Current liabilities 100 100
    • 600
            • Financed by :
    • Capital 100
    • Add Net Profit 200 300
    • Long term Liabilities 300
    • 600