Finance

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Finance by Mind Map: Finance

1. Balance sheets

1.1. The record of a company's value at a point in time

1.2. Assets

1.2.1. Fixed

1.2.1.1. Premises

1.2.1.2. Machinery

1.2.2. Current

1.2.2.1. Cash

1.2.3. something the business owns

1.3. Liabilities

1.3.1. Long term

1.3.1.1. Loans

1.3.2. Current

1.3.2.1. Creditors

1.3.3. something the business owes

1.4. IT MUST BALANCE

2. Day books and journals

2.1. Sales day book / journal

2.1.1. Credit sales

2.2. Purchases day book / journal

2.2.1. Credit purchases

2.3. Sales returns day book / returns in journal

2.3.1. Credit notes issued

2.3.1.1. Goods returned by customers to us

2.4. Purchases returns day book / returns out journal

2.4.1. Credit notes received

2.4.1.1. Good returned by us to suppliers

2.5. The journal (proper)

2.5.1. Less common and complicated items

2.5.1.1. One off purchases

2.6. Cash book

2.6.1. bank account

2.6.2. cash account

3. Why monitor accounts?

3.1. Operate legally

3.2. Keep track of business accurately e.g. profit and loss

3.3. Identify where they are losing and gaining money from

3.4. Identify deliberate and accidental accounting

3.5. Track of creditors and debtors

3.6. Stakeholders want accurate reports

3.6.1. build confidence

3.7. Prepare for cash flow forecasts and final accounts

3.8. Info for budgetting

4. Double entry

4.1. Used by ledgers - NOT BOOKS (except cash book)

4.2. Every financial action has two effects

4.2.1. Good

4.2.1.1. DEBIT SIDE

4.2.1.1.1. new asset

4.2.2. Bad

4.2.2.1. CREDIT SIDE

4.2.2.1.1. £20,000 cost

5. Ledgers

5.1. Sales

5.1.1. Accounts of customers that have bought goods on credit

5.1.1.1. Invoices issued

5.1.1.2. Credit notes issued

5.1.1.3. Payments recieved

5.2. Purchase

5.2.1. Accounts of suppliers whom the business has boguht goods on credit

5.2.1.1. Invoices received

5.2.1.2. Credit notes received

5.2.1.3. Payments sent

5.3. General

5.3.1. Most other accounts

5.3.1.1. Fixed assets

5.3.1.2. Expenses

5.3.1.3. Income

5.4. Cash book

5.4.1. cash account

5.4.1.1. cash held by business

5.4.2. business account

5.4.2.1. payments in and out of the bank account

6. Consequences

6.1. Fines for wrong information

6.1.1. Company's house

6.2. Business losses track of itself

6.2.1. Time and money spent on redoing accounts or putting procedures in place

6.2.2. Unable to assess itself successfully

6.3. Legal implications

6.3.1. Fraud

6.4. Wrong amount paid for tax

6.5. Lack of confidence

6.5.1. stakeholders

6.6. Creditors not paid

6.7. Poor management decisions

7. Depreciation

7.1. Reduction in value of a fixed asset

7.2. Shows "book value"

7.2.1. representation of how much use the asset has left for business

7.3. Value decreases due to

7.3.1. Wear and tear

7.3.2. Decay

7.3.3. Depletion

7.3.4. Obsolescence (technology e.g. VCR's today)

7.3.5. Inadequacy

7.4. Straight line

7.4.1. Reduce value of asset by same each year

7.4.1.1. Cost of asset - expected selling value / useful life (years)

7.4.2. BUT

7.4.2.1. doesn't account for problems with a machine e.g. renew parts

7.4.2.2. unrealistic

7.4.2.2.1. items don't decrease by same amount each year

8. Stakeholders interested in financial info (& why)

8.1. Creditors

8.2. Owners

8.3. Managers

8.3.1. performance of company

8.3.2. internal analysis

8.4. Customers / pressure group

8.5. Government

8.5.1. See how much a company owes accurately

8.6. Competitors

8.6.1. judge company's success

8.6.2. market share

8.7. Banks and lenders

8.7.1. See / gauge a company's ability to pay back money

8.8. Shareholders

8.8.1. Dividends

8.8.2. Consider investment

8.9. Investors

8.9.1. Safe investment?

8.9.2. Good return?

9. Profit and loss statement

9.1. a record of revenues and costs of the business over a period e.g. year

9.2. Three parts

9.2.1. Trading account

9.2.1.1. Cost of goods sold (sales) taken away from revenue (to make gross profit)

9.2.1.2. Cost of sales = (opening stock + purchases) – closing stock

9.2.2. Profit and loss account

9.2.2.1. indirect costs (overheads) taken away from gross profit

9.2.2.2. create net or operating profit

9.2.3. Appropriation account

9.2.3.1. How money is split up between

9.2.3.1.1. Corporation tax

9.2.3.1.2. Dividends

9.2.3.1.3. Reinvestment

9.3. measures amount of money a company makes or loses over a period

9.3.1. revenue is what the company earns through sale of goods or services

9.3.2. costs are something a company pays out when producing goods or services

10. Trial balance

10.1. checking system

10.2. all debit should equal credit

10.3. if it doesn't balance there are errors

10.4. a trial balancing might still have a error

11. Errors

11.1. Commision

11.1.1. Wrong name of supplier or customer

11.2. Omission

11.2.1. Transaction has occured BUT

11.2.2. no record has been made in accounts

11.3. Principle

11.3.1. transaction classified incorrectly

11.4. Compensating error

11.4.1. Coincidence

11.4.2. A number of mistakes that happen to cancel each other out

11.5. Original entry

11.5.1. original figure is incorrect

11.6. Reversal

11.6.1. entries on wrong side of account

12. Accruals

12.1. When item has been used but not yet paid for

12.2. Not recorded

12.2.1. No transaction has taken place yet

12.2.1.1. e.g. Jobs pay in arrears

12.2.1.1.1. Work for a period of time

12.2.1.1.2. THEN paid

12.3. decrease profit a business declares

12.4. amounts owing added to PL expenses

12.5. current liabilitiy in BL

12.5.1. reduces working capital

12.6. ADD ACCRUALS

13. Prepayments

13.1. Items paid for but not yet used

13.1.1. e.g. Insurance

13.2. DO NOT affect profits but will next financial period

13.3. increase profit declared

13.3.1. deducted from expenses

13.4. added to current assets of BL

13.4.1. increase working capital

13.5. MINUS prepayments

14. Corrections

14.1. Most errors found at later date

14.2. When discovered, original accounts cannot be altered

14.3. Corrections are made using double entry system. The journal is used as there are no source documents ot prove transaction has occured

14.3.1. A narrative can be written to explain the error and actions taken