Business BTEC Unit 3 - Aim C

What is accounting?

It involves recording business's financial transactions and prepare accounts from which business performance can be evaluated

Purpose of accounting

1. Recording transactions

2. Management of business

3. Compliance

4. Measuring performance

5. Control

Measuring perfomance

Accountants measure how well the business is performing through its:

- gross profit

- net profit

- assets owned by the business

- liabilities owed by the business

Without records it's hard to work out profit and loss

Control

- tracks trade receivables and trade payables

- ensures business meets day-to-day expenses

- decrease chances of getting into debts

- allows business to identify unusual activities

Recording transactions

Recording all the money coming into and going out the business (enable business to keep track of payments received and taxes (bills) are paid)

Management of the business

- helps coordinate resources

- monitor and control accounts, performance

Compliance

- protects against fraud

(fraud = individual/business acquires business money for personal gain, through illegal action)

What is revenue income?

It's the income that a business receives from selling their goods and services

Types of revenue income

- cash sales

- credit sales

- interest received

- discount received

- commission received

- rent received

Cash sales

Sales in which the buyer's payment obligation to the seller is settled on delivery

Credit sales

Purchases made by customers for which payment is delayed

Rent received

The amount of money received on properties rented by the business

Commission received

Fees earned by brokers and agents in making a sale or closing a deal

Interest received

It's the amount of interest earned on savings

Discount received

When a business pays a reduced price for goods

What is capital income?

Money invested by owners to set up a business (long-term investment)

Types of capital income

- loan

- mortgage

- shares

- debentures

- owner's capital

Loan

The amount of money borrowed from a bank, paid back with interest in installments over few years

Mortgage

A loan with a bank used to buy properties, paid back with interest in installments for over 25yrs

Shares

Issued by a company to shareholders who own the business, whom will receive dividends

Owner's capital

Money that owners have invested into a business

Debentures

A type of bond issued by companies to raise money

What is capital expenditure?

Refers to the items bought by the business

Types of capital expenditure

1. Non-current assets

2. Current assets

Non-current assets (tangible)

Items that will be remain within the business for a long time (e.g. land, buildings, machinery and equipment, vehicles)

Current assets (intangible)

Assets owned by the business that add value (non-physical e.g. brand name, image, goodwill, reputation)

What is revenue expenditure?

The amount of money spent by a business on general operating costs

Types of revenue expenditure

- insurance

- rates

- inventory

- rent

- heating & lighting

- water

- wages

- salaries

- administration

- marketing

- bank charges

- interest paid

- depreciation

- discount allowed

Insurance

Business legally required to have building, assets, public liability and employees liability insurance

Rates

Tax on non-domestic property (e.g. from council street lights service or bins collection)

Inventory

Products required to run a business (e.g. raw materials and finished products)

Rent

Paid by business that doesn't own their premises (monthly payments)

Heating & lighting

Payments for services such as gas and electricity

Water

Payments for supply of water to premises

Wages

Hourly paid rate to employees

Salaries

Annual figure paid to employees

Administration

Paperwork required to run a business

Marketing

Costs related to promoting and selling goods (e.g. flyers and adverts)

Bank charges

Bank account fees payable on every transaction

Interest paid

Interest paid on loans and mortgages

Depreciation

Reduced value of products

Discount allowed

Customers buying products at reduced prices (due to loyalty, repeat purchase)