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Adrienne Gallagher Notes

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Lecturer: Adrienne Gallagher

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Adrienne Gallagher Notes

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