Financial Statements and Banking Basics

Transferring money from one account to another. The source document is the printed receipt, authorised through chip and pin.

Historical backward looking financial document which shows how much profit or loss a business has made over the last 12 months

Includes revenue items which are from the everyday trading activities that happen on a regular basis like repairs,renewals,redecoration,replacement and rent

A financial document which looks at the current financial position of a business to gain an understanding of its future finances. This will give a business a broader understanding of trading activity with consideration of how assets, liabilities and capital have been accumulated to form the current financial position the business finds itself in

Includes capital items which are medium to long term namely spending on the acquisition and improvements of assets and receipts from the sale of assets as well as capital drawings and liabilities

Checks to ensure double entry procedure is followed its arithmetical accuracy both the debit and credit sides are totalled so check they agree and if not mistakes can be identified and corrected but not all errors are identified in the trial balance

Owners capital,Partners capital,Bank overdraft,Bank loan,Mortage,Ordinary shares,Debentures

Accountants generally record, collect, analyse, and report on financial data. In most cases, accountants use the financial records compiled by bookkeepers to prepare financial statements and reports, and to perform financial analysis

The sales ledger is an account for every customer of a business and records the money received for products or services, plus what is still owed contains trade receivables

The purchase ledger is an account of the suppliers of a business, documenting from whom the organisation has made purchases, what's been paid for, and how much is still owing contains trade payables

The general ledger provides a record of each financial transaction that takes place during the life of an operating company contains all other accounts

A cash book is a separate ledger in which cash transactions are recorded.Contains bank and cash accounts

Debit,Expenses,Assets,Drawings,Credit,Liability,Income,Capital

April, June, September, November

January, March, May, July, August, October, December

28 and 29 in a leap year

There are 2 accounts which are impacted for every transaction. Recording these transactions could either increase the total sum of entries on a given account or decrease it. Therefore, at the end of a certain period we must identify what the total balance on a given account is after having recorded all these individual transactions. The closing balance, balance cd will be included in the lower side making the total to both sides equal. This will then be brought down balance bd at the start of the new period

Include everything the company owns and are reported on a company's balance sheet they are bought or created to increase a firm's value or benefit the firm's operations

Once data has been recorded it has to be sorted to provide useful information to a business. Accountants create the income statement which shows how much profit has been made and statement of financial position which shows total assets are equal to total capital and liabilities

Term for financial assets includes funds held in deposit accounts, tangible machinery like production equipment, machinery, storage buildings

What customers owe the business for the goods or services they receive from the company. - cash/cheques doesn't exchange hands at the time of the transaction

Something a person or company owes usually a sum of money an obligation between one business and another not yet completed or paid for

The money a company owes its vendors for inventory-related goods, such as business supplies or materials that are part of the inventory

The amounts taken by the owner of a business for personal use usually made in the form of cash, but there could be other assets or goods withdrawn by the owner for personal use

Sales made in cash or with credit cards, or by cheque

Money spent, or costs by a business in their effort to generate revenue

Are purchases made by customers for which payment is delayed cash isn't collected until sometime after the sale is made

Are any items that are sold in the normal course of business trading. They are revenue incomes. Sales can be cash or on credit

Refers to the cost of transporting goods into a business from a supplier, as well as the cost of transporting goods from a business to its customers

Businesses carry out numerous financial transactions which cannot all be remembered so they have to write it down and historically it was recorded in books and now in an electronic data form as it minimises risk of fraud and makes the accounts reliable

For every transaction two accounts are affected one on the debit side and other on the credit side. The amounts recorded on both must be corresponding this is to ensure the fundamental principles set out in the accounting equation are followed so total assets are equal to total capital and liabilities

Someone that has an interest or concern in the activities of the business, they can be internal

The process a business or organisation uses to acquire goods or services to accomplish its goals. - you purchase merchandise for resale

Goods returned to the business by customers

Goods returned to suppliers by the business

Goods are paid for at the time of purchase/sale and by cash itself or cheque

Goods are paid for at a later date giving rise to trade receivables when customers pay us later or trade payables when we pay suppliers later

Contains all personal accounts of credit customers "trade receivables" (debtors)

Contains all the personal accounts of credit suppliers "trade payables" (creditors)

Contains all the other accounts namely the impersonal accounts

Contains all cash receipts and disbursements, including bank deposits and withdrawals.

List of the balances in all of the accounts prepared at regular intervals and the total of the debit balances brought down will equal to the total of the credit balances brought down

Resources owned by the business for medium to long term use, which will remain in the business for more than one year. They are not for resale but are used for generating profits

Cash itself and assets which will changed to cash within the year for resale and finance the everyday operations of the business

Amount owing which the business has to pay within the year

Amount owing repayable in more than one year

Records all invoices issues to customers for goods brought on credit.Cash sales will never be entered in the sales day book.Includes-Sales invoices when money is requested

When a customer returns goods to a business the business will issue a credit note to the customer copies of these are kept and used to enter the details in the sales returns day book.Includes-Credit notes which are used to cancel sales invoices.

Records all credit invoices for goods brought for resale.Includes-Purchase invoices

When a business returns goods it has purchased on credit it receives a credit note from the supplier and records this in the PRDB.Includes purchase credit notes

When transactions do not take place on credit and are paid for at the time the entry is made straight into the cash book. The cash balance must always be carried down on the credit side and brought down on the debit side because you can't have a negative cash balance

Used to record anything which does not go in the other books of original entry it shows both the debit and credit entries

Individual customer invoices are entered in the sales day book over a certain period which is then totalled. This total is entered into the sales account in the general ledger as a single entry although each invoice amount will be entered in the respective customer accounts in the sales ledger individually

Individual purchase invoices are entered in the purchase day book over a certain period which is then totalled. This total is entered into the purchase account in the general ledger as a single-entry although each invoice amount will be entered in the respective supplier accounts in the purchase ledger individually

Individual credit notes issued to customers are entered in the sales return day book over a certain period which is then totalled. This total is entered into the sales return account in the general ledger as a single entry although each credit note amount will be entered in the respective customer accounts in the sales ledger individually

Accuracy of the book balance is checked by comparing the bank balance as shown in the bank account in the cash book with the balance shown on the latest bank statement

Individual credit notes issued by suppliers are entered in the purchase return day book over a certain period which is then totalled. This total is entered into the purchase return account in the general ledger as a single entry although each credit note amount will be entered in the respective supplier accounts in the purchase ledger individually

Both are books of original entry/prime entry, each has a debit column and a credit and differences are that the cashbook is also a ledger account but a journal is not and the cash book deals with cash transactions but the journal deals with credit transactions

When cash is transferred to or withdrawn from the bank the double entry takes place in the cash book

Where the business records the amount on the paying in slip (Paying in slip - these slips record the amount of cash and cheques paid into the business bank account also known as 'lodgements')

A cheque is a written instruction to transfer money from a bank account and give it to someone else. The drawer is the person paying the cheque, who signs the cheque at the bottom. The payee is the person receiving the cheque. The cheque counterfoil is where the business keeps a record of the amount on the cheque

Sent by suppliers to customers who buy goods on credit to inform them of the amount due and the date for payment. This invoice will show the amount due before and after a trade discount and but it is amount after the discount which is entered in the ledger accounts

Document that a person or company receives when they buy something, giving details of price, payment conditions

Include a description of the service provided the amount owed and the deadline for payment

A sources document used to reduce or cancel the amount stated on a sale invoice it is raised and sent to a trade receivable following a credit sale typically because there has been a sale return due to a incorrect or damaged/faulty product having been delivered

The debit note can provide information regarding an upcoming invoice or serve as a reminder for funds currently due

A receipt is a document acknowledging that a person has received money or property in payment following a sale and must always include the date of purchase

At the end of the day there is a summary printed from the till of the total of the day's sales

These are increasingly replacing cheques as a means of transferring money from one account to another. If you have a bank current account you should be familiar with cheques and switch cards

This is an amount paid into an account directly through the banking system rather than issuing a cheque. It is a receipt— DR Bank CR payer

This is an automatic payment made by the payers bank account for a regular set amount it is a payment-DR payee CR bank

This is another form of regular payment made by the bank, however the authority to withdraw money comes from the payee's bank and the payments are variable. DR payee CR bank

Are made by banks to cover the cost of administering a current account. Bank charges are a business expense. DR Bank charger CR Bank

Is charged on bank overdraft. Like loan interest it is a business expense. DR Bank interest CR Bank

Some current accounts pay interest to customers. This is a receipt in the bank account and a source of income. DR Bank CR Bank interest

This is when a bank refuses to process a cheque, either because there is an error on the cheque or the drawer has insufficient funds in their account. A dishonoured (bounced) cheque is money going out of the bank and is a CR in the bank column of the cash book

Is offered to business customers usually in the same line of business to encourage them to buy more, regular or in one large quantities. This means that business customers pay less than the general public and a percentage is deducted from the total invoice

A record of all banking transactions recorded by the bank it is used as an important source document to identify automated banking transactions, dishonoured cheques and bank charges. It is needed to prepare a bank reconciliation to verify the accuracy of the cash book

Cash discounts are given by suppliers as an incentive to credit customers to pay promptly and settle an invoice before credit period expires. Unlike trade discounts, cash discounts do not alter the purchase price of product and the customers will be invoiced for the full amount due before any cash discount and the customer's account will be debited with that amount

The balance of the cash account recorded in the cash book showing the amount of cash kept in order to give change for the following days trade. The rest of the cash will be paid into the bank account for security and to earn interest

Most businesses try to minimise the amount of cash they keep in the till because It is safer to deposit money in the bank to minimise the risk of theft,businesses are charged interest on a daily basis a current account is overdrawn/exceeds its overdraft limit,some current accounts pay interest-leaving money in the till is an "opportunity cost"

Business customers pay less than the general public and a percentage is deducted from the total invoice and but it is amount after the discount which is entered in the ledger accounts.

This is when cash is transferred to or withdrawn from the bank the double entry takes place in the cash book

Will only be applied once the customers has made the payment although the entire balance will be entered into the debit side of the cashbook including cheque amount and cash discount

By comparing the bank balance as shown in the bank account in the cash book with the balance shown on the latest bank statement

Some items are processed automatically by the bank so will not have been recorded in the cash book,errors may have been made in completing the cash book,banks may have made an error,time differences mean a delay in the bank processing cheques

Process through which the business checks the accuracy of the business bank account by comparing it to the bank statement and "reconciling" any differences between the figures

This is when cash is transferred to or withdrawn from the bank the double entry takes place in the cash book as both the debit and credit entries are a single transaction so appear together in the same ledger and A c is entered along with the detail

A discount allowed is when the seller of goods or services grants a payment discount to a buyer

A reduction taken when moving a payment to a trade payable because the invoice is paid promptly and there is early settlement. It is expressed as percentage of the invoiced amount and is recorded as income in the ledger account and on the income statement

An automated bank transaction which is used to pay an amount into the bank account at regular intervals and eliminates the need for cash or cheques to be received. The bank statement is the source document to identify these transactions as the cash book would need to be updated upon receipt of the bank statement

Current assets-Prepaid expenses and prepaid income and Current liability-Accured expenses and prepaid income

Add accrued and minus prepayments

Is a current liability and just the amount accrued is shown

Is a current asset and just the amount prepaid is shown

Occurs when a receivable will probably not pay the amount that is owed so are a business expense

They are a business expense and must not be included in trade receibanles on thw sofp however they are shown in the trial balance.DR- Irrecoverable debts account in the general ledger and CR-The customers account in the sales ledger

Are customers who will probably not pay

A provsion is made for trade receivables when there is a possibility that they may not pay the provision is deducted from receivables on the sofp so that current assets are not over valued

treated as as unknown expense which reduces an assets value,but the amount is uncertain so a judgement is needed to calculate the amount the amount is set aside out of profits for a known expense or liability of an uncertain amount.

The income statement entry is the change in the provision from the previous year.If there is an increase in provision then it is an expense and if there is a decrease it is income and is added to gross profit.

The balance bought down on the provision for doubtful debts account is a credit.

Depreciation is the fall in value of a non current asset due to time,use/wear/tear,obsolescence(becoming out of date/obsolete)

The annual amount of depreciation is an expense of using the asset and is charged to the income statement

Is the most common depreciation method and when a business first acquires a non-current asset it does not know for certain how long the asset will last and how much it will be sold for on disposal and it must estimate the depreciation

Cost of the asset-residual value/expected useful life of the asset

Calculated by adding together the provision for depreciation figure in the tb from the previous year and adding the depreciation figure in the income statement which is the current years depreciation giving you the total depreciation up to date.

It is the net book value at the beggining of the year,the value of the asset depreciates most rapidly in the early years of its life, a more realistic method of valuing assets such as machinery and vehicles.It is calculated as a % of the reduced balance on the asset so that annual charge decreases each year.

When an asset has a finite life it will be disposed of either for cash/cheque or traded in for a more up to date version and the amount in which the receives is known as the disposal proceeds.

If the proceeds on disposal are greater than net book value there is a profit on disposal.

Value of non-current assets lose value over time i.e. valued higher at an earier point in time, Value of non-current assets lose value due to wear and tear i.e. not as pristine as it once was, Value of non-current assets lose value over time due to it becoming obsolete and/or out of date i.e. typewriters/ pagers

Is an allowance businesses make for predicted loss in the value of assets so that accounting records are prudent i.e. true value of assets are not overstated. Straight line method depreciates assets based on an agreed percentage of the original assets value ie cost. This means the depreciation amount for this method is linear ie. same amount each year. Reducing balance method depreciates assets based on an agreed percentage of the reduced balance/ NBV i.e. what it is worth now after subtracting the loss in value due to depreciation of previous year/s This means the depreciation amount for this method is non-linear i.e. not same amount each year as the reduced balance NBV of non-current assets decrease each year.

At cost is recorded on the debit side of the disposal account.Total depreciation is recorded on the credit side of the disposal account.Proceeds on disposal is recorded on the credit side of the disposal account.Profit on disposal is recorded on the debit side of the account and loss is recorded on the credit side.

Straightline depreciation is a suitable method for assets which depreciation at a constant rate such as buildings, fixtures and fittings bit it is unrealistic for other types of assets.Reducing balance method depreciates assets most rapidly in the early years of its life, a more realistic method of valuing assets such as machinery and vehicles.

Concept of prudence means that accountants always consider the worst-case scenario and understate, rather than overstate profits and asset values. The concept of consistency means that once an accounting policy has been decided, the firm should continue to use the same policy in subsequent years when preparing financial statements, unless there is a good reason for changing.The dual-aspect means the accounts must always balance.

Contra entries are made when a business is both a customer and a supplier of another business. DR the purchase ledger and purchases ledger account and CR the sales ledger and sales ledger control account

Errors are minimised because a double check is carried out each month if errors are made, the source of errors can be located more quickly,Scope for fraud is reduced because the accounts are usually under the control of a
senior book-keeper.

They do not rule out errors completely. Some CROPOC errors may still occur even though the control account balance agrees with the sales/purchases ledger figures. e.g an error of omission if an invoice is mislaid
• an error of commission if the entry is made in the wrong personal account
• An error of original entry if the wrong figure is entered in the books of original entry

Cash discount given for early settlement of an invoice, however if the payment is made by a
cheque which is subsequently dishonoured by the customer's bank the Sales Ledger Control
account must be debited not only with the amount of the cheque but also discount allowed.
Similarly if the business sends a cheque to a supplier which is then dishonoured the
Purchases Ledger Control account must be credited not only with the amount on the cheque but also with any discount received by the business.

Normally, the balance brought down in the Sales Ledger will be a DR because the Sales Ledger records receivables, and in a Sales Ledger Control Account the larger balance brought down will always be a DR; however if some customers have overpaid, the business will owe them money, and there will be a small balance brought down on the CR side.Receivables will have overpaid if they have paid an invoice in full but they should not have-for example, if they have returned goods (sales returns) or they have paid an invoice in good time and are entitled to discount allowed.

As firms grow and have more accounts there is a greater possibility that errors might occur,be more difficult to find and the firm will need to employ more staff as book-keepers.The Sales Ledger Control Account checks (controls) the Sales Ledger by firstly identifying errors before correcting them.At the end of the month the account is balanced of. If the accounts have been completed correctly the balance in the Sales Ledger Control Account should agree total trade receivables in the Sales Ledger, as shown in the Schedule of Receivables (a list of all receivables).

Entries in the General Ledger are made from the totals in the Books of Prime Entry and so Control Accounts are also known as Total Accounts, because they are based on these totals.

Sales ledger control accounts will record dishonoured cheques and any discount allowed associated with this as a debit entry i.e. increase the total receivable
Figure by reinstating the amount that the customers having initially decreased the amount owed on receipt of the cheque.Purchase ledger control accounts will record dishonoured cheques and any discount
received associated with this as a credit entry i.e. increase the total payable figure by reinstating the amount owed to the suppliers having initially decreased
the amount owed upon issuing the cheque.

Normally, the balance brought down in the Sales Ledger will be a DR because the Sales Ledger records receivables, and in a Sales Ledger Control Account the larger balance brought down will always be a DR.
The total of debit balances in the SLCA will normally be larger than the total of credit balances as these are the totals of the individual amounts owed by customers in
the sales ledger. However if some customers have overpaid, the business will owe them money, and there will be a small balance brought down on the CR side.Receivables will have overpaid if they have paid an invoice in full but they should not have-for example, if they have returned goods (sales returns) or they have paid an invoice in good time and haven't taken their entitled discount allowed.

Has two uses one to prepare the final accounts is and sofp and then to check the arithmetical accuracy of the ledger accounts if the trial balance doesn't balance this shows errors have been made either in the accounts or in the tb itself.

When an error cannot be rectified through simple double entry into the respective accounts a temporary account called a "suspense account" is opened to make the two sides of the tb equal.The errors are then investigated.However this is only relevant for pupat errors

Just because the tb balances it doesnt mean there is no errors in the ledger accounts it just means that every dr has a corresponding cr.So if the error on the dr side cancels out the errors on the cr side the trial balance will still balance even though errors have been made.

Comission,reversal,omission,principle,original entry,compensating

Where an amount is posted to an incorrect account of the correct type(This error has no effect on Gross Profit, profit for the year or the Statement of Financial Position)

Where the account that should have been debited is credited and vice versa

Where a transaction is completely omitted from the books of account

Where an amount is posted to an incorrect class of account-an error of principle will affect the Profit/Statement of Financial Position.

Where an error is made transferring an amount from the source document into the books of original entry. This generates an identical incorrect posting of the entry in the ledger accounts with both the debit and credit sides equally affected.

Where equal and opposite errors cancel each other out namely errors which cancel each other out and do not fall into the other five categories

The arithmetical totalling of accounts

An arithmetical error which results in the totals being too low

An arithmetical error which results in the totals being to high.

The journal is the book of original entry to correct errors

These are the only errors the suspense account can resolve:Posting,unequal posting,partial omission,addition,transposition

where one side of a transaction is posted to the wrong side of an account -the entry is made on the same side for both accounts

where the debit side of the transaction does not equal the credit side.

where one side of the transaction is not posted

In the trial balance itself or in a general ledger account -Overcasting or Undercasting in totalling a Day Book or an account or incorrect calculation of the Balance cdd on an account

where the figures of an amount are transposed- the correct numbers but in the wrong order

GAP CREMDOC:Going concern,accurals,prudence,consistency,realisation,entity,materiality,dual aspect,objectivity,cost

When accounts are prepared it is assumed the business is going to continue to operate for the foreseeable future and assets are recorded at cost.If the business were to cease trading assets might have to be reduced to below costs and others may have risen.A going concern will have a balance carried down in asset and liability accounts as at the year end.

Concept says that income statements should be based on income and expenditure not receipts and payments namely the amounts due for the year rather than amounts which have gone through the business bank and cash accounts.Also known as matching concept because revenue for an accounting year must be matched with expenditure relating to that year.

Means that accountants always consider the worst case scenario and understate rather than overstate profits and asset values concept also known as conservatism.

Means that once an accounting policy has been decided the firm should continue to use the same policy in subsequent years when preparing financial statements unless there is a good reason for changing.Because if not comparisons between years would become meaningless and true performance can't be identified.Whereas if an increase in profit is due to a change to a reduced provision then this doesn't provide a business with an accurate analysis and may give them false impression that the business performance is improving.

Sales are corded when the customer physically removes the goods and the business raises a sales invoice and purchases when a supplier delivers the goods regardless of when any payment is made or when the customer promises to buy the goods.Giving raise to trade receivables and payables.

For accounting purposes the owners of a business are regarded as completely separate from the business so there is no need for a capital and drawings account as private items must not be treated as business items.

This concept is relevant when making the distinction between capital and revenue item.It is only necessary to make this distinction if it makes a material (significant) difference.

The double entry system for every dr entry there must be a matching cr and visa versa this means the accounts must always balance

Accountants should not show personal bias and transactions should be based on evidence such as source documents.

A company records assets on the sofp at historical cost which is how much the business originally paid for an asset.This cost is not just the cost of the asset itself but any "one off" expenditure associated with the acquisition of asset and making it into a usable condition.

Is spending on the everyday trading activities of a business.Revenue receipts are incomes derived from the usual activities of the business.Revenue items go on the income statement and occur on a regular basis,repairs,renewals,redecoration,replacement,rent both paid and received.

Is spending on non current assets or the improvements of non current assets,they are not usual activities of the business such as receipts from the sale of assets.Capital items go on the sofp so capital drawings,liabilities are also capital items.

Inventories must be valued at the lower of cost or new realisable value.

Cost-how much the business orginally paid for the goods
Nrv-how much the goods could be sold for,less any costs in making into a saleable condition.

Goods being displayed by the marketing department at trade fairs and goods sent on a sale or return basis where the customter has not yet indicated that they want to buy the goods

Free samples should no be included as inventories are unsold goods for resale and by definition free sample are not going to be sold.

Because it encourages business to be cautious in overstating inventory and any other assets and would support a more pessimistic approach

A Partnership is a business that has more than one owner but is not a Limited Liability Company.

Partners have unlimited liability whereas shareholders in a company have limited Liability and companies have continuity but a partnership does not. A shareholder can sell his or her shares without affecting the normal activities of the business. If a partner leaves or joins the partnership, technically the old business comes to an end and a new one starts from the date the partner leaves or joins.

The Partnership Act 1890 is the most important and although changes have been made most of its terms still apply. The most important terms for our purposes are:A Partnership has a minimum of two but since 2002 no legal maximum. (Prior to 2002 there was a maximum number of 20 partners, except for doctors, lawyers and accountants).

With a Deed of Partnership and Without a Deed of Partnership

The Capital to be contributed by each Partner, The Interest on Drawings, if any, The Interest on Capitals, if any, any Salaries to partners, the ratio in which profit or losses will be shared.

There is no Interest on Capital or Drawings, There are no Salaries to Partners, Profits or losses are shared equally, partners are entitled to interest at 5% per annum on loans made to the partnership.

More owners means that a partnership will have access to more capital than a sole trader. Banks will be more willing to lend to a partnership because more owners mean more security for the loans. Decisions can be discussed; two heads are better than one.Some partners may have specialist skills that will be use to the business.Suppliers may be more willing to sell on credit because there are a number of owners to turn to if the business cannot pay.

Profits must be shared with other partners ,Unlimited liability (in most cases), Any agreement made by one partner binds them all (except LLPS). If a Partnership fails and one partner cannot pay towards its debts the other partner or partners must pay.

The profit and loss for the year must then be shared between the partners according the terms of any Deed of partnership in an appropriation account.

Is treated in exactly the same way as interest on any loan it is an expense (financial cost) in the income statement.It doesn't go on either the appropriation account or current account

excess resources available that can be used in the future (CREDIT)

when there isn't a sufficient amount of money to cover all of the expenses and debts (OVERDRAWN)

Advantages:Easy to identify when a partner is overdrawn,reduces risk to other partners (if one partner cant pay up),easy to calculate interest on capital,capital accounts are charged only when there is no change in the partnership agreement (pages 10 onwards)
Disadvantages:Possible extra work-another account to prepare,only worth doing if the partnership agreement includes interest on capital.
benefits to a partnership of maintaining separate capital and current

Easy to identify when a partner is overdrawn, reduces risk to other partners (if one partner can't pay up), Easy to calculate interest on capital, Capital accounts are changed only when there is change in the partnership, agreement and therefore isn't that onerous.

There is no Interest on Capital or Drawings, there are no Salaries to Partners, Profits or losses are shared equally partners are entitled to interest at 5% per annum on loans made to the partnership.
difference between the capital account and the current account of a

Current account- personal accounting record of each partner's short term financial balance within the partnership based on what they are each owed i.e. interest on capital, salary and profit share and what they each owe i.e. drawings and interest on drawings.
Capital account- a fixed account which records the long-term investment each partner has contributed and accumulated within the partnership.

Goodwill cannot be valued precisely and the most commonly used methods are to calculate a multiple of: average profits over the past few years/average weekly sales over the past financial year /comparing the value of similar businesses

A established business is usually worth more than a new business and may have built up goodwill making the market value of the business worth more than its net assets at valuation on the Statement of Financial Position. There are various reasons for this: Good reputation due to product quality and/or good customer service, Established customer base,Established links with suppliers and Good location. So someone buying into a business pays for goodwill in order to gain access to the future profits of an established business.

is an intangible non-current asset and is difficult to value objectively for this reason, goodwill does not usually appear in the books unless it is purchased but it can serve a useful purpose in a Partnership change. Internally generated goodwill is known as inherent goodwill.

A partner may not work as much as before,A partner's skills and ability may have changed, A partner may be doing more than before.A change in the Profit Share Ratio will mean a partner, or partners, getting more or less profit that they did before so those who lose out need to be compensated by those who gain.

converting the retiring partners' capital account to a loan account, by arranging a bank overdraft,by taking out a bank loan, by taking on a new partner

Use the Accounting equation to work out capital ,Profit less drawings is the difference between opening and closing capital

Because part of the money received from receivables relates to the previous year. Plus receivables still owe some money for the current year

A calculation of Gross Profit will show what the closing inventory should have been based on the % mark-up What the inventories should have been Less the actual inventories (found by a stocktake)= the missing inventories.

means how easily a firm can turn its assets into cash without loss and refers to a firm's ability to pay day to day expenses and short term debts.

for example if trade receivables take too long to pay. A shortage of working capital is the main cause of business failure so management of working capital is important for the short term survival of a business.

is an important role of book-keeping and involves monitoring the Sales Ledger and Purchases Ledger accounts to make sure that customers are paying on time in order for the business to pay its suppliers in good time.

Increase revenue - increase selling price to increase the mark up OR reduce selling price to increase the volume of sales/Offer sales promotions/Offer longer periods of credit/Advertise more/Reduce cost of sales - for example by finding cheaper suppliers or negotiating higher trade discount.

increase selling price or reduce cost of sales to increase the difference between cost of sales and revenue

Increase Gross Profit (see above) or reduce expenses

Reduce selling price/special offers to increase sales/Offer other sales promotions

Increase current assets/Reduce current liabilities

Increase liquid assets/Reduce current liabilities

Offer cash discount/Chase up slow paying customers

Negotiate longer credit periods/Find alternative suppliers

is a forecast of receipts minus payments the purposes of a cash budget are:To make sure that the business plans ahead so that it has enough cash available to operate and pay bills on time - cash flow problems are the major cause of business failure/To alert managers to possible shortages so that they can take action before hand, for example: reminding customers to settle debts/delaying payment to suppliers/ negotiating a bank overdraft to tide them over.To highlight times when the business will have cash surpluses which can be invested short term to gain interest, for example, putting the money in a bank deposit account.

A cash budget is a forecast, financial statements are historic/A cash budget includes both revenue and capital items/it is possible to have negative balances in the cash budget if the business is overdrawn at the bank/Only cash transactions are included - non-cash items such as provision for depreciation do not go in a cash budget.

Based on receipts less payments, Includes revenue and capital items,e.g. purchase of non-current assets, drawings, repayment of loans, Timing differences ,e.g. Cash is not received until customers pay, Includes only cash transactions

Based on income less expenditure/ Only revenue items included, Also includes credit transactions/Includes accruals/prepayments/Includes non-cash items - bad debts, depreciation, doubtful debts

High sales on credit and accrued income but slow paying customers mean high profits but poor cash flow/Purchasing non-current assets improves long run profitability but mean large cash outflows/Repayment of loans decreases cash but has no effect on proft.

current assets keeps money in the business /Taking out loans increases cash flow but only the interest on loans affects profit/Depreciation of non-current assets can be a significant expense which reduces profit but has no effect on cash flow.