C1 - Purpose of accounting

What does an accountant do?

• The accounting function is responsible for all of the issues related to finance i.e. money within the business.

What is recording transactions?

• Recording the flow of the money into, around and out of an organisation.

Why is it important that all transactions are recorded accurately?

• To meet legal requirements

• Aid the smooth running of the business

• Accurately produce end of year and interim accounts

What can transactions be?

• Internal e.g. expense claims by employees

• External e.g. paying a supplier

• Expenditure e.g. buying an asset

• Income e.g. cash sales

What is the management of the business?

• Management involves planning, monitoring and controlling the resources of a business.

• This includes financial resources and non-financial resources e.g. human resources & stock.

• All resources have associated costs.

What happens under planning? - Management of the business

• Budgets i.e. targets or limits for expenditure and income in a given period of time such as a marketing budget.

• Cash flow forecasts i.e. a prediction of the amount and timings of cash flowing in and out of a business over a period of time.

What happens under monitoring? - Management of the business

• Production, including costs and output levels i.e. comparing actual expenditure to budgets.

• Forecasts for profits and profitability.

• Ensuring cash flow targets are met.

What is under controlling? - Management of the business

• Inventory control e.g. reorder quantities and avoiding holding too much stock that may become obsolete.

• Capital expenditure e.g. purchase of new machinery.

What is compliance?

• Compliance means obeying the rules e.g. meeting legal requirements.

What is preventing fraud in terms of compliance?

What can a business do to prevent fraud?

• The wrongful use of resources for personal gain.

Internal actions:

• Keeping petty cash locked away.

• Monitoring expense claims.

• Monitoring shrinkage or wastage levels of raw materials, WIP and finished goods.

• Internal audits e.g. inventory checks, invoicing.

External actions:

• Validating new suppliers.

• Checking for falsification of records.

• Compliance with International Financial Accounting Standards.

• Working with external auditors.

What is compliance in terms of compliance with law and regulations?

• HMRC compliance in relation to corporation tax, VAT and employee payroll.

• Appropriate insurance cover e.g. professional indemnity and employer’s liability.

• PCI security council standards - applicable to any business accepting credit cards.

• Credit legislation

• Other aspects of legislation that an accountant may be involved with include health and safety at work and the data protection act.

What is measuring performance?

What does it help to do?

• A business will measure its performance against targets, previous years, amongst branches or product lines and against competitors.

Helps inform decision making e.g.:

• Should a product be discontinued or a branch closed?

• Where can cost savings be made?

• What targets should be set for next year?

What are the tools to aid measuring performance?

• Identifying and investigating variances between target or budgeted outcomes and actual outcomes.

• e.g. target profit v actual profit.

• Inter and intra firm comparisons.

• Ratio analysis i.e. looking at one figure in relation to another to allow better inter and intra firm comparisons.

• Benchmarking i.e. comparing the businesses’ performance to those considered to be performing at their best.

What are the 2 different types of budgets?

• Adverse - negative, not how you want it to work

• Favourable- positive, better

What is Control in terms of Assisting with the prevention of fraud?

• Restricted access to key systems e.g. passwords for important confidential information.

• Internal and external audits.

• Clear procedures - allowing for audit trials.

Trade receivables - Control

Money owned by the business but not yet received - resulting from selling on credit.

• Clear payment terms e.g. 30 days.

• Contracts with customers stating payment terms and procedures for late payment.

• Checks prior to agreeing credit terms.

• Credit control to follow procedures and chase late payments.

Trade payables - Control

Money owed by the business but not yet paid resulting from buying on credit.

• Contract with suppliers.

• Aged creditor report - an automated report that highlights payments due within a given time period and any overdue payments.

• Relies upon data being used accurately input upon receipt of invoices.