Accounting Assignment

Rochelle Rawlingson 384542

Accounting By Rochelle Rawlingson

Tutor: Paul McSweeney

Accounting 1

Accounting is the profession of an accountant, Accounting is also widely referred to as the language of business. There are two main forms of accounting that I will be studying which are Financial and Management Accountancy. Financial Accounting Financial accountancy is used to prepare accounting information for people outside the organisation or not involved in the day to day running of the company; financial accountants produce financial statements based on Generally Accepted Accounting Principles (GAAP) of a respective country. This is when the accountant studies the past figures of a business, and helps record transactions, also financial accounting includes measuring the financial performance of the business. Financial accountants study many accounts but the main three are the following; cash flow forecast, profit and loss account and the balance sheet. The above three accounts are important because each document gives different information, and this enables the financial accountants to collect a wide range of facts and figures, which can summarise the business’ performance in more detail. Financial accountancy is used to prepare accounting information for people outside the organisation or not involved in the day to day running of the company; financial accountants produce financial statements based on Generally Accepted Accounting Principles (GAAP) of a respective country. Financial accounting serves the following purposes: 1Producing general purpose financial statements 2Provision of information used by management of a business entity for decision making, planning and performance evaluation 3For meeting regulatory requirements (information obtained from http:/en.wikipedia.org/wiki/financial_accounting) Management Accounting This type of accounting is based on future facts and figures, and estimating what may happen with in the company. Management accountants predict and estimate the future financial costs and sales by studying the figures from the past and the current figures, and then relating those figures with the situation the business is in now. This type of accounting can help companies see whether they will make their aims

Rochelle Rawlingson 384542 and objectives, this can be used in a positive way because the business can then see if they might be able to expand or buy stock in advance. The Human Resources and Sales department within a business may benefit from accurate Management accounting. Management accounting is concerned with information for management purposes: it is internal information for the organisation itself and is very rarely made public, unlike financial accounting information. The main jobs of an accountant are; 1Maintaining, preparing and auditing financial documents. 2Analysing business progress. 3Monitoring transactions.

What is the purpose of accounting? There are two answers to this question, below are both answers; 1)The purpose of accounting is to provide information about financial situation of an organisation. 2)It also is the systematic recording, reporting and analysis of financial transactions of a business

Who would be interested in viewing the business accounts? Many different groups of people will be interested in viewing the business accounts for a various reasons: below I will explain in more detail. Shareholders – These people will want to see the accounts because they will want to know if their money has been well invested. This is applicable within a limited company. Staff – Staff may want to see the accounts to make sure their job is safe, but employees may not be seen as senior enough to view the accounts. This is applicable within a both ltd and plc companies. Owner – To monitor whether his/her business is running smoothly and to oversee its progress. This is applicable within both limited and pubic companies. Government (HM Revenue and Customs) – To monitor the business’ progress and to check every process is being carried out legally. The government will monitor 3

every business, whether it is Ltd or Plc. Potential Investors – To investigate whether the business is worth investing in. All potential investors will want to look into the businesses on goings. Bank – If the business owes the bank money, or is trying to obtain a loan, the bank will want to see the accounts so that they can look to see if the repayments could be paid, if not then this will lead to that business being refused the loan.

Below I am going to explain what each of the headings mean; Capital Income – This is money that is entering the business, there can a number of sources from which this can arise, including the following; 1Selling shares (plc) 2Owners savings (sole trader) 3Retained profit (plc) 4Selling assets (plc)

Capital Expenditure – The main source of capital expenditure is from the fixed assets, these are things such as; 1Land and buildings 2Office equipment 3Machinery 4Furniture, fixtures and fittings 5Motor vehicles Revenue Income – This is money generated by the sales of the company’s goods and/or services. Below are some examples; 1Selling stock 2Renting premises, machinery etc 3Commission The revenue income differs depending on the size of the business, a driving instructor (sole trader) for example, may make most of his money from commission from his lessons, but a larger business such as C&V Fashions, may make more money from its sales. Finally, a large high street retailer like Marks And Spencers will rake in money from all directions, whether it is from owner’s investment, new investors, sales etc.

Rochelle Rawlingson 384542

Revenue Expenditure – Revenue expenditure is charged to the profit and loss account. It is expenditure that is incurred (1) for the purpose of the trade of the business (e.g. selling costs, administration costs) or (2) to maintain the existing earning capacity of fixed assets. http://www.tutor2u.net/newsmanager/templates/?a=1389&z=82 Below are examples; 1Cost for premises, rent, heating and lighting, insurance 2Admin costs, phone charges, postage and packaging, printing 3Salaries, training, pensions 4Carriage on sales and marketing 5Bank charges, loan and mortgage interest 6Purchase of stock Task 2 (b) Capital income (tutor notes) – This is money received from the owner, example for sole traders can be; 1.Cash 2.Assets But for plc’s it can be money gained from selling shares, this helps them gain from share capital. Capital income(google search result) - The income from sales of capital assets. http://dictionary.bnet.com/index.php?d=capital+income Capital expenditure (tutor notes) – This is money spent on fixed assets or increasing the value of fixed assets, two examples could be ; 1.Buying machinery 2.Expanding the business (premises) Capital Expenditure (Wiktionary) - Funds spent by a company to acquire or upgrade a long-term asset. http://dictionary.bnet.com/index.php?d=capital+expenditure Revenue Income (Tutor notes)- This is revenue that is made during trade. These could be income sales (cash and credit transactions), rent received and commission. Revenue Income(Internet) - From whatever source derived; that which returns or 5

comes back from an investment. http://www.answers.com/revenue+income?cat=biz-fin Revenue Expenditure (Tutor Notes) – This is the cost of spending on everyday expenses, such as; purchasing stock. Revenue Expenditure (internet)- Is an outlay than only benefits the current business year. It is treated as an expense that is matched against revenues. http://www.financial-dictionary.com/revenue_expenditure.html Task 2(c) Below, I am going to give accurate descriptions for each above term and explain the differences between them; Capital Income – From the sources I have used to collate my information, my general description of capital income is that; It can be many different things including: 1.Money from owner. 2.Selling shares(plc). 3.Money received from sales of capital assets. In regards to capital income there is different points that mean the same thing, because a sole trader, plc and ltd company all have different ways of doing things. Capital Expenditure – From the sources I have used to collate my information, my general description of capital expenditure is that; This is money spent by the company to either: 1.Enhance/upgrade existing assets. 2.Purchase new assets. 3.Expand premises. The amount of capital expenditure spent can depend on how much that particular business has to spend, and some companies may not need to spend much and will have a low level of capital expenditure. Revenue Income – From the sources I have used to collate my information, my general description of revenue income is that; This is the money made during trade, which could be from cash and credit transactions, rent received, commission etc. In general revenue income is always returning into the business, but it can be from a range of different sources.

Rochelle Rawlingson 384542

Revenue Expenditure– From the sources I have used to collate my information, my general description of revenue expenditure is that; Revenue expenditure is the money spent on everyday expenses, such as; purchasing stock. Revenue expenditure is treated as expense and they are matched against the revenues for each business year. Differences The difference between capital income and revenue income is that; capital income is money that is received into the business but from owner, share selling etc, and revenue income is money made from trade sales. The difference between capital expenditure and revenue expenditure is that; capital expenditure is money spent on upgrading/acquiring assets and renovation of business premises, and revenue expenditure is money spent on everyday purchases like purchasing stock. Task 2 (d) In this part of the assignment, I have been asked to choose 3 different businesses and state the differences between each company’s capital income, revenue income, capital expenditure and revenue expenditure. The 3 businesses I have chosen are a driving instructor(sole trader), C and V Fashions (case study) and Marks And Spencers. (plc) For a driving instructor the examples of the 4 categories would be; Capital Income –Cash and assets received. Revenue Income –Commission from lessons. Capital Expenditure– Motor vehicles. Revenue Expenditure – L plates and other items needed for the car, and paying for repairs. For C and V Fashions the examples of the 4 categories would be ; Capital Income – Cash and assets (stock). Revenue Income – Money from cash and credit sales in store. Capital Expenditure– Renting premises. Revenue Expenditure – Purchasing stock. For Marks And Spencers the examples of the 4 categories would be ; Capital Income – Cash and assets (premises and stock). Revenue Income – Money from sales and selling shares. Capital Expenditure– Expanding business(possibility). Revenue Expenditure – Purchasing stock. 7

Task 2 (e) Report In this report I will describe each of the above bold terms and give examples. Capital income is money that is entering the business, but this money can enter the business in a variety of different ways, and it can also depend on what type of business it is. Capital income can also be money created by selling assets. As I explained previously a driving instructor capital income will not be from premises, this is because the main asset a driving instructor needs are the cars. Revenue income is also money that is entering the business but in a different way to the money from capital income does. For example, revenue income can be created by selling shares(plc) or from cash and credit sales. Marks And Spencers’ revenue income will be different to a sole trader’s this is because Marks And Spencers is a plc and this means that they sell there shares to the public. On the other hand a sole trader will not have shares to sell because it is just a one person business. Capital expenditure is money that is spent on larger jobs with in the business, things like; expanding the business, purchasing premises and upgrading/acquiring machinery. If I again refer to the driving instructor (sole trader), the sole trader will not need to really purchase premises, but may need to upgrade his vehicles, this is counted as capital expenditure. Although this is said, C and V Fashions will need to purchase premises to store stock, this is also capital expenditure but it is in contrast to what the sole trader’s capital expenditure will be. Revenue expenditure is money which is spent on everyday needs within a business, the most common one is purchasing new stock. All companies will need to buy stock at some point, but different businesses will need to stock different things. In the cases of my 3 chosen businesses, the driving instructor will have to the least revenue expenditure, this is because once everything is bought to start up the business then not much will need to be bought after. C and V Fashions will need to keep purchasing new clothes to sell, but this does also depend on how many they are selling. Marks And Spencers will have to spend the most revenue expenditure this is because they sell such a wide range of products, ranging from food to clothes, then every time stock is reduced then new stock will need to be purchased. Also Marks And Spencers is the by far the largest of the 3 and can therefore also afford to spend the most revenue expenditure. Task 3 Cash flow forecast attached.

Rochelle Rawlingson 384542

Task 4 In the cash flow forecast I have prepared, between July and December, C and V Fashions is experiencing financial difficulties. The situation is not helped by the business purchasing a company car for £10,000 is purchased in July, this makes the figures negative from the start, and until December the company struggles to make much money. In the months from July to December the sales figures increased every month, but this couldn't make the final figures positive, these months seem to have been a constant struggle. Throughout the 6 months the net cash flow figure has been in the red for all the months apart from December, December's figure isn't negative because the business received an investment, all this did was decrease the figure, but it still stayed in negative. Also the closing bank balance is constantly in the red, this figure increases and decreases from month to month, and C and V Fashions do not seem to be able to build any momentum to try and reduce their debt. C and V Fashions need to reduce their negative cash status, this is because the business will soon go bankrupt, C and V Fashions have a far greater payments total than the income and this the main downfall. No business will survive for long if their outgoings are greater than their incoming cash. In the future C and V Fashions need to try and increase their sales if possible, this will go some way to help their figures balance out, also the company drew out £ 1200 each month between July and December, personal drawings are meant to be kept to a minimum because this adds to the outgoings of a company. Cash flow Forecast Included

Task 5 In August and September sales may rise, this is because people will be buying summer wear for their holidays, and in the next few months (October and December), people will be buying their clothes in advance for the winter period. These two groups of months should increase the sales, as theit will be a rush to buy 9

clothes. Using 2006 figures ,in the months between August and December the UK sales figures were as follows; August – Sales increased by 1.5% September - Sales increased by 0.2% October - Sales decreased by 0.3% November - Sales increased by 0.3% December - Sales increased by 2.6% http://www.statistics.gov.uk/pdfdir/rs1107.pdf Now, I am going to adjust my cash flow forecast to encounter the above increasing and decreasing figures. The changes that I made from my cash flow forecast where the following ; August – Sales were originally £2805, but with the increased rate, the sales figures rose to £3225.75. September – Sales were originally £2861, but with the increased rate, the sales figures rose to £2918.22. October – Sales were originally £2918, but with the decreased rate, the sales figures rose to £2909.24 November – Sales were originally £2977, but with the increased rate, the sales figures rose to £3066.31. December – Sales were originally £3036, but with the increased rate, the sales figures rose to £3825.36. All of the figures I have altered are highlighted in blue on my cash flow forecast. Task 6 To reduce cash flow problems, C and V Fashions need to try and reduce their expenses, this is because a large amount of expenses has a negative effect on the business’ outgoings. The business needs to especially reduce drawings, this is because drawings are meant to be kept to a minimum, as this will benefit the cash status within the company. The money spent on the company car, seems a bad idea, this is because the business didn’t have enough money coming into the business to purchase an item for so much cash. Personally, I think C and V Fashions should of waited to buy the car this is because ideally they should of waited till the business had enough incomings.