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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 Premises Machinery

1.2.2. Current Cash

1.2.3. something the business owns

1.3. Liabilities

1.3.1. Long term Loans

1.3.2. Current Creditors

1.3.3. something the business owes


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 Goods returned by customers to us

2.4. Purchases returns day book / returns out journal

2.4.1. Credit notes received Good returned by us to suppliers

2.5. The journal (proper)

2.5.1. Less common and complicated items One off purchases

2.6. Cash book

2.6.1. bank account

2.6.2. cash account

3. Double entry

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

3.2. Every financial action has two effects

3.2.1. Good DEBIT SIDE new asset

3.2.2. Bad CREDIT SIDE £20,000 cost

4. Depreciation

4.1. Reduction in value of a fixed asset

4.2. Shows "book value"

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

4.3. Value decreases due to

4.3.1. Wear and tear

4.3.2. Decay

4.3.3. Depletion

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

4.3.5. Inadequacy

4.4. Straight line

4.4.1. Reduce value of asset by same each year Cost of asset - expected selling value / useful life (years)

4.4.2. BUT doesn't account for problems with a machine e.g. renew parts unrealistic items don't decrease by same amount each year

5. Stakeholders interested in financial info (& why)

5.1. Creditors

5.2. Owners

5.3. Managers

5.3.1. performance of company

5.3.2. internal analysis

5.4. Customers / pressure group

5.5. Government

5.5.1. See how much a company owes accurately

5.6. Competitors

5.6.1. judge company's success

5.6.2. market share

5.7. Banks and lenders

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

5.8. Shareholders

5.8.1. Dividends

5.8.2. Consider investment

5.9. Investors

5.9.1. Safe investment?

5.9.2. Good return?

6. Prepayments

6.1. Items paid for but not yet used

6.1.1. e.g. Insurance

6.2. DO NOT affect profits but will next financial period

6.3. increase profit declared

6.3.1. deducted from expenses

6.4. added to current assets of BL

6.4.1. increase working capital

6.5. MINUS prepayments

7. Why monitor accounts?

7.1. Operate legally

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

7.3. Identify where they are losing and gaining money from

7.4. Identify deliberate and accidental accounting

7.5. Track of creditors and debtors

7.6. Stakeholders want accurate reports

7.6.1. build confidence

7.7. Prepare for cash flow forecasts and final accounts

7.8. Info for budgetting

8. Ledgers

8.1. Sales

8.1.1. Accounts of customers that have bought goods on credit Invoices issued Credit notes issued Payments recieved

8.2. Purchase

8.2.1. Accounts of suppliers whom the business has boguht goods on credit Invoices received Credit notes received Payments sent

8.3. General

8.3.1. Most other accounts Fixed assets Expenses Income

8.4. Cash book

8.4.1. cash account cash held by business

8.4.2. business account payments in and out of the bank account

9. Consequences

9.1. Fines for wrong information

9.1.1. Company's house

9.2. Business losses track of itself

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

9.2.2. Unable to assess itself successfully

9.3. Legal implications

9.3.1. Fraud

9.4. Wrong amount paid for tax

9.5. Lack of confidence

9.5.1. stakeholders

9.6. Creditors not paid

9.7. Poor management decisions

10. Profit and loss statement

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

10.2. Three parts

10.2.1. Trading account Cost of goods sold (sales) taken away from revenue (to make gross profit) Cost of sales = (opening stock + purchases) – closing stock

10.2.2. Profit and loss account indirect costs (overheads) taken away from gross profit create net or operating profit

10.2.3. Appropriation account How money is split up between Corporation tax Dividends Reinvestment

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

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

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

11. Trial balance

11.1. checking system

11.2. all debit should equal credit

11.3. if it doesn't balance there are errors

11.4. a trial balancing might still have a error

12. Errors

12.1. Commision

12.1.1. Wrong name of supplier or customer

12.2. Omission

12.2.1. Transaction has occured BUT

12.2.2. no record has been made in accounts

12.3. Principle

12.3.1. transaction classified incorrectly

12.4. Compensating error

12.4.1. Coincidence

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

12.5. Original entry

12.5.1. original figure is incorrect

12.6. Reversal

12.6.1. entries on wrong side of account

13. Accruals

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

13.2. Not recorded

13.2.1. No transaction has taken place yet e.g. Jobs pay in arrears Work for a period of time THEN paid

13.3. decrease profit a business declares

13.4. amounts owing added to PL expenses

13.5. current liabilitiy in BL

13.5.1. reduces working capital


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