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Finance by Mind Map: Finance
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Finance

This is just a demo map that you can delete right away, if you feel like it...

Balance sheets

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

Assets

Fixed, Premises, Machinery

Current, Cash

something the business owns

Liabilities

Long term, Loans

Current, Creditors

something the business owes

IT MUST BALANCE

Day books and journals

Sales day book / journal

Credit sales

Purchases day book / journal

Credit purchases

Sales returns day book / returns in journal

Credit notes issued, Goods returned by customers to us

Purchases returns day book / returns out journal

Credit notes received, Good returned by us to suppliers

The journal (proper)

Less common and complicated items, One off purchases

Cash book

bank account

cash account

Why monitor accounts?

Operate legally

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

Identify where they are losing and gaining money from

Identify deliberate and accidental accounting

Track of creditors and debtors

Stakeholders want accurate reports

build confidence

Prepare for cash flow forecasts and final accounts

Info for budgetting

Double entry

Used by ledgers - NOT BOOKS (except cash book)

Every financial action has two effects

Good, DEBIT SIDE, new asset

Bad, CREDIT SIDE, £20,000 cost

Ledgers

Sales

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

Purchase

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

General

Most other accounts, Fixed assets, Expenses, Income

Cash book

cash account, cash held by business

business account, payments in and out of the bank account

Consequences

Fines for wrong information

Company's house

Business losses track of itself

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

Unable to assess itself successfully

Legal implications

Fraud

Wrong amount paid for tax

Lack of confidence

stakeholders

Creditors not paid

Poor management decisions

Depreciation

Reduction in value of a fixed asset

Shows "book value"

representation of how much use the asset has left for business

Value decreases due to

Wear and tear

Decay

Depletion

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

Inadequacy

Straight line

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

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

Stakeholders interested in financial info (& why)

Creditors

Owners

Managers

performance of company

internal analysis

Customers / pressure group

Government

See how much a company owes accurately

Competitors

judge company's success

market share

Banks and lenders

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

Shareholders

Dividends

Consider investment

Investors

Safe investment?

Good return?

Profit and loss statement

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

Three parts

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

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

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

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

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

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

Trial balance

checking system

all debit should equal credit

if it doesn't balance there are errors

a trial balancing might still have a error

Errors

Commision

Wrong name of supplier or customer

Omission

Transaction has occured BUT

no record has been made in accounts

Principle

transaction classified incorrectly

Compensating error

Coincidence

A number of mistakes that happen to cancel each other out

Original entry

original figure is incorrect

Reversal

entries on wrong side of account

Accruals

When item has been used but not yet paid for

Not recorded

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

decrease profit a business declares

amounts owing added to PL expenses

current liabilitiy in BL

reduces working capital

ADD ACCRUALS

Prepayments

Items paid for but not yet used

e.g. Insurance

DO NOT affect profits but will next financial period

increase profit declared

deducted from expenses

added to current assets of BL

increase working capital

MINUS prepayments

Corrections

Most errors found at later date

When discovered, original accounts cannot be altered

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

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