Essential Concepts in Business Accounting and Financial Reporting

Business Accounting Fundamentals

Accounts are the financial records of a firm’s transactions.

Accountants are the professionally qualified people who have the responsibility for keeping accurate accounts and for producing the final accounts.

Final accounts are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business.

Methods of Making Payment

1. Cash: The traditional method of payment which is still widely used for small amounts.
2. Cheque: Cheques are not money; they are instructions to a bank to transfer a specified sum in the form of a bank balance to a named person.
3. Credit Card: This allows the consumer to obtain goods and services now but to pay for them in the future.
4. Debit Card: These are used in the same way as credit cards but, instead of a ‘credit’ bill being accumulated on the cardholder’s account, the money is simply transferred directly from the cardholder’s bank account to that of the seller.

Calculating Business Profit

The trading account shows how the gross profit of a business is calculated.

The sales revenue is the income to a business during a period of time from the sale of goods and services.

The cost of goods sold (COGS) is the cost of producing or buying in the goods actually sold by the business during a time period.

A gross profit is made when sales revenue is greater than the cost of goods sold.

Net profit is the profit made by a business after all costs have been deducted from sales revenue. It can be calculated by subtracting overhead costs from gross profit.

The profit and loss account (P&L) shows how the net profit of a business and the retained profit of a company are calculated.

Key Accounting Definitions

Depreciation is the fall in the value of a fixed asset over time.

An appropriation account is that part of the profit and loss account which shows how the profit after tax is distributed—either as dividends or kept in the company as retained profits.

Retained profit is the net profit reinvested back into a company, after deducting tax and payments to owners, such as dividends.

The Balance Sheet and Financial Health

The balance sheet shows the value of a business’s assets and liabilities at a particular time.

Assets are those items of value which are owned by the business. They may be fixed (long-term) or current (short-term).

Liabilities are financial obligations or debts owed by the business. They represent a financial burden on the firm.

Essential Accounting Formulas

• Total Assets - Total Liabilities = Shareholder’s Funds (Owner’s wealth)
• Current Assets - Current Liabilities = Working Capital
• Net Assets = Fixed Assets + Working Capital
• Capital Employed = Shareholders’ Funds + Long-term liabilities
• Capital Employed = Net Assets

Liquidity is the ability of a business to pay back its short-term debts.