Financial Accounting

The purpose of financial accounting is to provide financial statements and financial reports to individuals who require them. This includes preparing a balance sheet, income statement, cash flow and notes. People that use this information usually have an interest in the company due to investment or ownership.

Capital and Revenue Expenditure

Capital expenditure – spending on items that can be used time and time again in the production process (fixed assets)

Revenue expenditure – meets current day-to-day expenses e.g purchase of raw materials and the payment of wages

Profit and Loss Account

This is a financial statement that shows a businesses revenues, expenses and profit / loss over a period of time

• Gross profit = Sales – cost of sales
• Net profit = Gross profit – overheads
• Retained profit = Net profit – tax – dividends
• Trading account – shows the income earned by the business over a trading period
• Appropriation account – the uses of net profit after taxation

The following groups are interested in a businesses profit and loss accounts:

• Shareholders
• Managers
• Employees
• Inland revenue / government

Balance Sheets

Balance sheets are financial statements that record the assets and liabilities of a business at a specific point in time

• Assets – items owned by a business
• Fixed assets – items owned by a business expected to be retained for at least one year e.g. buildings
• Current assets – items that are expected to be turned into cash in the next year e.g. cash, stock
• Liabilities – monies owed by a business
• Current liabilities – debts owed by the business payable within a year e.g. creditors
• Long term liabilities – debts owed by the business which wont be repaid within the next year e.g. bank loan

Balance Sheet Rules

• Assets = Liabilities
• Total Assets = Fixed assets + current assets
• Liabilities = Share capital + borrowings + other creditors + reserves

Depreciation

The decrease in value of assets over time.

This is shown as an expense on the profit and loss account

Fixed assets will be depreciated in value on the balance sheet. Two methods: Straight line and Reducing

"Window Dressing"

These improve the appearance of a companies balance sheet

Can borrow money for a short period of time to improve cash position just before date of balance sheet

Use sale and leaseback Include intangible assets e.g. goodwill / brands on balance sheet

Capitalise expenditure – including things as assets that could be classified as expenses