Accounts Theroy for Prelim.txt
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A bin card is a term used to describe a card that records the physical movement of items of stock.
Originally located at the end of storage bins, a bin card shows opening balance, issues and receipts of stock items and the current balance.
Break Even Point
The break even point is the level of activity where no profit or no loss is made.
If an organisation is operating above it's break even point it is making a profit.
If an organisation is operating below it's break even point it is making a loss.
BEP can be calculated by Fixed Costs/Unit Contribution.
For example, £1000 (Fixed Costs) / £100 (Unit Contribution) BEP = 10 units.
Goodwill is an amount added to the value of a business in recognition of the company's reputation; customer loyalty etc.
Goodwill is recorded as an intangible asset in a balance sheet (between fixed assets and current assets).
It can be written off - over a period of years or at the same time.
Goodwill is calculated if a business is being sold, a new partner is being included on a partnership or a partner is leaving or retiring and the profit/loss ratio has to be changed.
Goodwill can be measured in a number of different ways.
Memorandum of Association
A Memorandum of Association must be lodged with the Registrar of Companies when a company I formed.
- The memorandum contains 6 clauses:
- 1. Name of Company;
- 2. Location of UK registered office;
- 3. Objects, defining the company's power (what the company can do i.e. what it sells etc).
- 4. If a limited company then it must state that the liability of members is limited;
- 5. Details of authorised share capital and number of shares issued;
- 6. A statement that the company is a public limited company.
Note: The memorandum for a private limited company does not include clause 6
It is illegal for a company to exceed the powers stated in the objects clause ie it is only allowed to sell what it has stated in its object clause for example cars. If it also sold lawn mower then it would be operating outwith this clause and be acting illegally.
A partnership is an association of two or more people formed for the sole purpose of running a business.
A partnership can take two forms - when all partners have unlimited liability for the business debts (referred to as general partner) and where partners have limited liability (referred to as a sleeping partner).
A partnership must have at least one partner which has unlimited liability.
Sleeping partners are not normally involved in the day to day running of the business.
Partners in the business will share profits equally (unless stated differently).
Private Limited Company (LTD)
The companies act defines a Private Limited Company as a company which cannot sell shares to the public.
A Private Limited Company does have share capital but share ls are chosen by the company.
The shares of a Private Limited Company are not available on the stock exchange.
Investors in Private Limited Companies have limited liability.
A Private Limited Company must have at least one shareholder.
Under certain circumstances a Private Limited Company can convert to a PLC (Public Limited Company).
A Private Limited Company must have authorised share capital.
Public Limited Company (PLC)
A Public Limited Company offers it's shares to the general public. They are normally offered for sale through the London Stock Exchange.
Once the shares have been purchased the buyer is referred to as a shareholder and becomes a part-owner of the business.
If the company goes into receivership, shareholder liability is limited i.e. they only risk losing the value they paid for their shares not their personal possessions.
Role of Financial Accountant
A financial accountant is responsible for recording and reporting of the external transactions of an organisation.
They also contribute during decision making regarding strategy.
Accountants extract and interpret information from the financial records for a wide range of interested parties throughout that organisation - shareholders, potential investors, bankers, employees, trade creditors and government departments.
The Financial Accountant is responsible for controlling the working capital of a business, ensuring debtors, creditors and stocks are maintained at an acceptable level, taking the day to day decisions, giving advice to the Board of Directors (very often the Financial Accountant is a Director of he company) and advising on capital investment.
The Financial Accountant is also responsible for the preparation of: Final Accounts (Profit and Loss and Balance Sheet); Reports (based on differences between actual and budgeted performance); Interpretation of financial information - for example advising on trends.
Role of Management Accountant
Management accountants are responsible for recording both internal and external transactions.
For example, they are responsible for both monitoring and analysing costs in a detailed manner eg the costs of a department or an individual job.
Typically, the management accountant monitors costs on an ongoing basis and provides monthly reports.
There is no pre-determined format for management accounts and reports can be as detailed or as brief as the organisation requires eg production budget
Opportunity cost is the term used to describe what has to be given up in order to get something else.
For example, you may have to choose between buying a computer game or jeans as you cannot afford to buy both. If you decide to buy the jeans then the opportunity cost of the jeans is what you have given up to get them - the computer game.
Examples in business include deciding whether or not to accept a new contract. Accepting the contract will commit resources preventing them from being used on other work.
The opportunity cost of accepting the contract is therefore any other work that could have been done instead.
Employees paid by Time Rate are paid for the number of hours they have worked.
This is the most commonly used system of payment in Great Britain eg 35 hour week.
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