Financial and management accounting

1
Financial and management accounting
2
Reference

• FINANCIAL AND MANAGEMENT ACCOUNTING
• Pauline Weetman
• Financial Times/Pitman Publishing

3
Reference

• BUSINESS ACCOUNTING AND FINANCE
• Catherine Gowthorpe
• Thomson Learning
• 2003

4
Why construct accounts?

• An historical record of financial performance
• Monitor of current performance
• Aid to management decision making
• Taxation and other statutory disclosures

5
What is accounting?

• .Accounting is the process of identifying,
  measuring and communicating financial information
  about an entity to permit informed judgements and
  decisions by users of the information.
• A statement of basic accounting theory, American
  Accounting Association 1996

6
Key accounting areas

• Operating a process
• Identification of financial information
• Measuring financial information
• Communicating financial information
• Defining a business entity
• Defining users
• Defining judgements and decisions of users

7
Users of accounts
8
Accounting fields

• Financial accounting
• External reporting of performance

• Management accounting
• Internal reporting mechanism that provides
  information for those who make decisions about
  the business entity
• Used to
• Direct attention
• Monitor performance
• Solve problems

9
Conventions of accounting

• Going concern
• the entity is likely to remain in operation
• Matching
• comparison of revenue and expense over a similar
  period of time
• Realisation
• revenue should not be recognised until received
  and expenses not recognised until incurred
• Consistency
• Prudence
• underestimating revenue and overestimating costs
• Objectivity
• exclude personal opinion

10
Conventions of accounting

• Verifiable
• accounts should be capable of independent
  verification
• Unit of measure
• common denominator ( or or not both)
• Periodicity
• entity performance over a consistent period of
  time
• Duality
• every action has a consequence
• Materiality
• actions have to materially affect the entity
• Relevance all information relevant to user to
  be included

11
Financial statements for the external user

• Primary financial statements
• Trading Profit and Loss Account
• measure of performance
• Balance sheet
• measure of financial position
• Cash flow statement
• measure of financial adaptability

12
Secondary financial statements

• Gross margin
• Measure the performance of individual enterprises
  within the business

13
Analysis statements

• Disposal of funds statement

14
The trading environment
A PERIOD IN TIME
MONEY IN
MONEY OUT
15
Receipts

• Money received by the business

16
Payments

• Outgoings

17
Cash

• Cash is money
• Cash is a physical transaction
• ....anytime, anywhere, anyplace...

18
Cash items

• I am giving you a 5 note
• You are paying me 5 with a cheque
• That crash has reduced the value of my car by 550

19
Trading period

• Accounts are related to a specific time period
• Annual - taxation
• Monthly - regular reporting on progress
• Cash items are adjusted to take into account the
  trading period
• Allows accounts to be compared on a like for like
  basis

20
Terminology
21
Trading items

• Trading items relate to the payments and receipts
  made in order to utilize the capital assets
  contained within a business

22
Capital items

• Capital is a measurement of the worth of items
  which can realise a value
• eg Machinery items
• Building valuation
• Land

23
Personal items

• Personal items are payments or receipts made by
  the business on behalf of or to the owner
• eg Personal Drawings
• Income Tax

24
The accounting equation
ASSETS - LIABILITIES
NET WORTH
NET WORTH is equivalent to WEALTH
25
Assets

• .rights or other access to future economic
  benefits controlled by an entity as a result of
  past transactions or events.
• ASB (1995) Statement of Principles for Financial
  Reporting

26
Examples of assets

• Land
• Buildings
• Machinery
• Livestock
• Deadstock
• Debtors
• Investments

27
Assets

• Fixed asset
• An asset used by an enterprise for production
• An asset intended for use on a continual basis
• An asset not intended for sale
• Current asset
• An asset likely to be converted into cash within
  the trading period

28
Liabilities

• .obligations of an entity to transfer economic
  benefits as a result of past transactions or
  events.
• ASB (1995) Statement of Principles for Financial
  Reporting

29
Examples of liabilities

• Overdraft
• Loans
• Mortgages
• Creditors

30
Liabilities

• Long term (fixed) liabilities
• Liabilities expected to remain in place beyond
  the next trading period (12 months)
• Current liabilities
• Liabilities likely to be repaid within the
  trading period (12 months)

31
Effect of changes in accounting equation
32
Balance sheet format

• Companies Act 1985
• Specifies statutory format for companies
  reporting balance sheet
• Small business have exemptions that produce a
  simplified format

33
Balance sheet format companies
http//www.inlandrevenue.gov.uk/manuals/pummanual/
specificguidance/pum4850.htm
34
Simple balance sheet format
35
Source of information for accounts

• Cash book
• Bank statements

36
Cash flow

• Flow of money into business over a period of time
• Information sourced from the cash book
• Cash book is a record of all cash transactions
• Cash surplus/deficit

37
The Cash Flow Statement
38
Net Cash Flow

• Positive
• Money flowing IN to the business
• Receipts gt Payments
• Negative
• Money flowing OUT of the business
• Receipts lt Payments

39
Cash Flow statement annualised
40
Cash Flow statement - periodic
41
Effect of cash flow on bank balance

• A positive net cash flow increases the bank
  balance
• A negative net cash flow reduces the bank balance
• OPENING BANK BALANCE
• NCF
• CLOSING BANK BALANCE

42
Cash Flow statement - periodic
OPENING BALANCE (1400)
43
Trading Profit and Loss Account

• A measure of business financial performance
  during a specific time period
• Statutory document
• Demonstrates PROFIT or LOSS

44
Trading Profit and Loss Account (TPLA)

• RECEIPTS (adjusted for debtors)
• plus
• CLOSING VALUE of stocks
• less
• PAYMENTS (adjusted for creditors)
• less
• OPENING VALUATION of stocks

45
Revenue

• Receipts attributable to a period in time

46
Expenditure

• Payments attributable to a period in time

47
Trading valuations

• Valuation of trading assets at the start and end
  of an accounting period that are used to operate
  the business
• livestock, crops, cultivations
• deadstock
• Record the market value or the total cost to
  date at the start and end of an accounting
  period

48
TPLA format
49
Creditor and Debtor adjustment

• Revenue Receipts Opening debtors Closing
  debtors
• Expenditure Payments Opening creditors
  Closing creditors

50
Debtors schedule
51
Creditors schedule
52
Deadstock reconcilliation

• Items of Deadstock need to be reconcilled for
  expenditure, amount used and opening and closing
  stocks
• EXPENDITURE items of are placed in the TPLA and
  items USED in Gross Margins
• OPENING EXPENDITURE USED CLOSING
• or
• OPENING EXPENDITURE - USED CLOSING

53
Deadstock reconcilliation format
54
Non Cash Receipts

• NON CASH RECEIPTS are items produced by the
  business and consumed by the owner without any
  cash transaction taking place
• Included as a trading item of revenue

55
Adjusting for personal use

• Personal items are excluded from trading accounts
• Income tax
• Private use of vehicle
• House electricity, water, telephone
• Private drawings

56
Personal use - format
57
Adjusting for capital items
58
Depreciation

• . A measure of the wearing out, consumption or
  other reduction of the useful economic life of a
  fixed asset, from a range of causes.
• FINANCIAL AND MANAGEMENT ACCOUNTING Pauline
  Weetman

59
Straight line depreciation
DEPRECIATION 10 of ORIGINAL BALANCE
60
Straight line depreciation
61
Buildings depreciation - format
62
Reducing balance depreciation
DEPRECIATION 25 of OUTSTANDING BALANCE
63
Reducing balance depreciation
64
Straight vs Reducing balance depreciation
65
Machinery depreciation - format
66
Loans and mortgages

• Major long term liabilities
• Loans
• Usually no security
• 1-10 years
• Mortgages
• Land used as security
• 10-40 years

67
Loan schedule

• Repayments are treated as capital and excluded
  from TPLA
• Interest payments are trading items and are
  included in TPLA

68
Company accounts must include

• a profit and loss account
• a balance sheet signed by a director
• an auditors' report signed by the auditor (if
  appropriate)
• a directors' report signed by a director or the
  secretary of the company
• the notes to the accounts
• group accounts (if appropriate)
• Companies Act 1985
• (as amended in 1989 and later)

69
Reconciling accounts

• Check for accuracy of calculations
• Profit and Profit
• Profit and Net Cash Flow
• Opening and Closing Net Worth