Accounts revision

Integrity - being straightforward and honest in all business relationships

Objectivity - not allowing bias and being transparent and fair

Professional competence and due care - maintaining professional knowledge for providing services to employers or clients

Confidentiality - information aquired in business not discussed to third parties exept with permission

Professional behavior - complying with relevant laws and regulations

Income Statement

Revenue 

Opening Inventory 

Purchases

Less closing inventory

Cost of Sales

Gross Profit  revenue - cost of sales

Less expenses (revenue expenditure)

Profit for the year gross profit - expenses

Non current assets - Property, Fittings, Machinery (Cost - depreciation = carrying value)

Current assets - Trade recievables, Inventory, Cash or Bank

= Total Assets

Capital - Opening capital + Capital interjection + Profit for the year - Drawings

Current liabilities - Trade payables, Bank overdraft

Non current liabilities - Loan, Mortgages

= Total Capital and Liabilities

Revenue 

• Opening Inventory 
• Purchases
• Less closing inventory

Cost of Sales

Gross Profit  revenue - cost of sales

Less expenses: Distribution, Administration & Sales and marketing

Profit from operations

Finance costs debenture interest, loan interest

Profit before Tax

Tax limited companies must pay tax as a percentage of profits

Profit after Tax

Share capital      Share premium      Retained earnings      Total

Balance at start                         ...                        ...                               ...                       ...

Profit for the year                      ...                        ...                               ...                       ...

Dividends paid                          ...                        ...                               ...                       ...

Issue of shares*                        ...                        ...                               ...                       ...

Revaluaion*                              ...                        ...                               ...                       ...

Balance at end                         ...                        ...                               ...                       ...

Retained earnings figure goes into Statement of financial position

*could be included if relevant

Non current assets - (Cost - depreciation = carrying value)

- Two catagories: Intagiable or Property, Plant and equiptment

Current assets - Trade and other recievables, Inventory, Cash or cash equivalents

= Total Assets

Equity - Issued share capital (shares that have been issued at nominal value)

    - Capital reserve (non trading profit such as share premium and revaluation)

    - Revenue reserve (retained earnings available to be paid as dividends)

Current liabilities - Trade and other payables, tax liability

Non current liabilities - Debentures

= Total Equity and Liabilities

Possibly Available:                                                                            Possibly Not available:

Cash book                                                                                        Capital at beginning
Banking details and invoices                                                            Purchases/Sales for year
Expenses                                                                                          Cash book summary
Record of assets and liabilities                                                         Profit for year

Solutions

• opening a trial balance
• constructing a cash/bank account
• control accounts
• accounting equation
• ratios: GP mark-up and margin, inventory turnover, profit in relation to revenue

Mark Up: gross profit ÷ cost of sales x 100

Margin: gross profit ÷ revenue x 100

Inventory turnover (in days): average inventory ÷ cost of sales x 365

Inventory turnover (times): cost of sales ÷ average inventory

Profit in relation to revenue: profit before tax ÷ revenue x 100

Purchases: payments to pays - trade pays @beginning of year + trade pays @end of year

Sales: reciepts from recievables - trade rec @beginning of year + trade rec @end of year

Control Accounts

Sales ledger control account

• Dr: bal b/d, interest charged, sales
• Cr: returns in, discount allowed, irrecoverable debts, contra, bal c/d

Purchase ledger control account

• Dr: returns out, discount recieved, contra, bal c/d
• Cr: bal b/d. interest charged, purchases

Benefits:

• knowledge of double entry not required
• less expensive day-to-day
• time saving
• convinent
• suitable for small businesses
• a cahs based income statement can be prepared

Limitations

• higher cost at year end
• lack of up-to-date management information
• statement of account sent to trade reviecables may not be completely accurate
• dangers of shortfall or theft of cash and inventroy
• there may be a lack of accuracy
• additional costs may be incurred

1. calculate opening capital (statement of affairs)

2. calculate closing cash/bank balance (cash/bank account)

3. calculate credit purchases (purchase ledger control account)

4. calculate credit sales (sales ledger control account)

5. calculate sales (credit sales + cash sales)

6. calculate expenses (expenses account)

7. calculate profit/loss on disposal of NCA (disposals account)

8. income statement (revenue - COS = GP - expenses = PFTY)

9. SOFP (NCA + CA = Net Assets, Capital + PFTY - drawings = closing capital)

+

• possibility of increased capital
• individual partners may be specialised
• more cover for illnesses

-

• decisions may take longer
• could be disagreements
• retirement or death could cause disruption 
• each partner is liable

Usually covers the following:

• division of profits
• partners salaries/comission
• interest on capital and rates
• interest on drawings and rates
• interest on loan (always 5%)

APPROPRIATION ACCOUNT

Profit for the year                                                         ....

Add: interest on drawings                    ....           

Less: salary, interest on capital           ....

Total                                                                             ....

Share of profit between partners         ....

Current Account:

• Dr: share of loss, drawings/goods for own use, interest on drawings, bal c/d
• Cr: bal b/d, share of profit, salary/commission, interest on capital

Goodwill - intangable non current ***et without physical form, its value always subject to negotiation

Admission of a new partner - when there is a new partner the goodwill has to be changed...

• 1. Dr: old amount in goodwill account, Cr: partners capital account with old amount (in old PSR)
• 2. Dr: partners capital with new amount (new PSR), Cr: new amount in goodwill account

Retirement of a partner - when someone retires the rest of the goodwill is shared out and also their money from the capital and current accounts has to be paid back which either comes out of the bank account or the retired person may choose to leave some capital as a loan

• 1. Dr: old amount in goodwill account, Cr: partners capital account with old amount (in old PSR)
• 2. Dr: partners capital with new amount (new PSR), Cr: new amount in goodwill account

Revaluation of ***ets

• Increase in value of ***et: Dr: ***et account with increase, Cr: revaluation account with increase
• Reduction in value of ***et: Dr: revaluation account with decrease, Cr: ***et account with decrease
• Increase in provisions: Dr: revaluation account with increase, Cr: provision account with increase
• Decrease in provisions: Dr: provision account with decrease, Cr: revaluation account with decrease

All limited companys follow the Companies Act 2006.  Each company must produce:

• income statement
• statement of financial position
• statement of cash flow
• statement of changes in equity
• notes to financial position (including accounting policies)
• directors report
• auditors report

Directors must under the company law: act within their powers, promote success, excersixe independant judgement, care, skill and diligence, avoid conflicts and not accept benefits.

Capital Reserves

 - revaluation reserve: when a NCA is revalued upwards

 - share premium: issued additional shares at higher amount

Revenue Reserves

reserves generated from trading activities for use in the businesses future

These are not funds to be used whenever, they are represented as an asset

Directors report

• principal activities of company
• review of company over past year
• likely developments
• directors names adn shareholdings
• proposed dividends
• significant differences between book value and market value
• political and charitable contributions
• actions taken on employee involvement
• policies on: employment of disabled, health & safety at work, payment of suppliers

Auditors report

• states directors responsible for financial statements
• the way the audit was performed
• auditors view of companies financial statements

Issue of shares - the initial shares given out by the business, issued at nominal value

Shares issued at a premium - difference between issue price and nominal value, added on to profitable businesses

Bonus issue - a business issues free shares to existing shareholders out of reserves, no cash flows out of the business

Rights issue - seeking to raise futher finance, offered to existing shareholders at a lower price

Operating activities

• profit from ops
• + depreciation for the year
• + loss/- profit on sale of NCA
• - dividend recieved
• + decrease/- increase in inventory, trade rec or trade pays
• - interest/tax paid

Investing activities

• + proceeds from sale of NCA
• - purchase cost of NCA
• + interest/dividends recieved

Financing activities

• + reciepts from increase in share capital and loans
• - repayment of share capital and loans
• - dividends paid

Profit/Loss on sale:

cost price - total depreciation = carrying value ... procceeds from sale - carrying value = profit/loss

Rules:

+ loss to profit from ops or - profit from profit from ops

show the total sales proceeds from sale of NCA

The main theme of ratios is: 

• profitability
• liquidity
• efficiency
• capital structure

Gross profit margin = Gross Profit ÷ Revenue x 100 

Gross profit mark up = Gross Profit ÷ Cost of sales 

Expenses in relation to revenue = Expenses ÷ revenue x 100

Profit in relation to revenue = Profit before tax ÷ revenue x 100

Return on capital employed (sole trader) = profit before interest ÷ (capital + NCL) x 100

Return on capital employed (limited company) = profit from ops ÷ (capital + NCL) x 100

Current ratio (working capital) = current assets ÷ current liabilities 

Liquid capital (acid test/quick ratio) = (current assets - inventory) ÷ current liabilities

Rate of inventory turnover (days) = average inventory ÷ cost of sales x 365

Rate of inventory turnover (times) = cost of sales ÷ average inventory

Trade revievable days = trade reveivables ÷ credit sales x 365

Trade payable days = trade payables ÷ credit purchases x 365

Capital gearing = NCL ÷ (issued share capital + reserves + NCL) x 100

Dividend yeild = divident per share ÷ market price per share x 100

Earnings per share = profit after tax ÷ number of issed ordinary shares x 100

Dividend cover = profit after interest and tax ÷ ordinary share dividend paid x 100

Price earnings = current market price ÷ earnings per share

Interest cover = profit before interest and tax ÷ interest payable

• retrospective nature of ratios based on past performances
• differences in accounting policies
• inflation when comparing year to year
• reliance on standards
• other considerations: economic, state of the business, comparing like with like

A cost unit (a unit of output to which costs can be charged) can be...

• a unit of of production from a factory
• a unit of service (eg gigabyte of internet usage/attendance at a pool)

A cost centre is a section of a business to which the costs are charged

The main types of costing are:

• Absorbtion costing: (calculate profit and inventory valuation) total costs are absorbed among cost units
• Marginal costing: (help with decision making) cost of producing one extra unit of output
• Activity based costing: (indentify reasons for for overheads) overheads are attributed to output on basis of activites 
• Standard costing: (calculate costs in advance) pre-determined cost for materials, labour and overheads

Direct materials + directs labour + direct expenses + overdeads = ABSORBTION COST

• absorbtion costing absorbs the total cost of the whole business amongst all of the cost units
• used to calculate profit and inventory valuation for financial statements

• Activity based costing attributes overheads to output on the basis of activities
• Used to identify reasons whey overheads are incurred for a particular activity

• A cost driver is an activity which causes costs to be incurred depending on what the activity is (if the activity was processing orders that would depend on how many orders there where, if the activity was marketing that would depend on the amount of advertisements)
• A cost pool is a group of overhead coust that are incurred by the same activity

therefore the activity based costing looks like this...

overhead cost + cost pool + cost driver + production = output

... cannot be directly identified with each unit of output, they can also be classified by a function under a different heading such as factory expenses/finance costs

Allocation of overheads is charging/attributing to a particular cost centre of overheads that are incurred by that cost centre... When allocating overheads some belong to one cost centre (salary of a person who works in one sector) so they can just be allocated where they belong

Apportionment of overhead is sharing the overhead over cost centres where they relate, each charged with a proportion of overhead cost... A department will recieve the proportion of the rates that are incurred to their department worked out by a basis of apportionment

Overhead absorption rates

OAR = budgeted overheads ÷ budgeted activty (measured usually by labour or machine hours)

• 1. Cost per labour hour = budgeted overheads ÷ budgeted direct labour hours...
• ...to apply it... Overhead absorbed and charged = direct labour x OAR

• 2. Cost per machine hour = budgeted overheads ÷ budgeted machine hours...
• ...to apply it... Overhead absorbed and charged = machine hours x OAR

Over-absorbtion or uder-absorbtion is the differece between the total amount of overheads absorbed in a given period and the total amount spent on overheads

Standard costing sets the planned cost for materials (quantity and quality), labour (labour hours required and cost) and overheads (output into expected overheads) in a period of time

Setting Standards:

• Purchasing - determining prices and expected trends of materials
• HR - current wage and salary rates, bonuses and grades of employees
• Management services - determine standard amount of time a task takes
• Production - responsible for production quantities and overheads

1. Set standard cost

2. Compare and calculate variance

3. Analyse and explain reason for variance

4. Take action

Materials Price variance = actual quantity x (standard price - actual price)

Materials Usage variance = standard price x (standard quantity - actual quantity)

Labour Rate variance = actual labour hours x (standard rate - actual rate)

Labour Efficiency variance = standard rate x (standard hours - actual hours)

Sales Volume variance = (actual quantity - standard quantity) x standard price

Sales Price variance = (actual price - standard price) x actual quantity

the variance will either be adverse (ADV) or favourable (FAV)