Introduction To Accounting Accountants –Types of

Accountants/qualificationsACA, ACCA, ACMA, CPA, AAT, IATA What is it all about?Accounting is sets of figures about resources.For a business:

What have they gotWhat they used to haveThe change in what they have gotWhat they may have in the future

Users of Accounting information:

1. Equity Investor Groups (existing and potential shareholders)

2. Loan creditor groups3. Employees4. Analyst adviser (e.g. stockbrokers)5. Business contacts – competitors, creditors,

customers6. Government (e.g. revenue)7. Public (e.g. consumer and environmental

groups)

Attributes of Useful Accounting Information:

1. Relevant to the user2. Understandability3. Reliability (checked by auditors)4. Complete (gives total picture)5. Objective (unbiased)6. Timeliness7. Comparability (from year to year

and from business to business)

Double Entry Book-keepingDouble Entry Book-keeping - System is based on

the simple idea that for every transaction there is a double action – a giving and a receiving

For example if we purchase a car by cheque·        Car is received·        Money is given Each transaction is recorded twice -     once on the debit sideAnd again on the credit side of the corresponding

account

Layout of an account

Account____________ Debit Side | Credit Side

 (Often referred to a T- account)

Detailed Layout of an Account

Account Name-------------------------------------------------------Date | Details | f | € | Date| Details | f | €

Date: Date of entry

Details: Name of corresponding account

F: Reference code, where other information is held

€: Amount of money involved in transaction

There Are 4 Types of Accounts Expense accounts:Record the cost of goods and services used by the business (e.g.

purchases, rent)  Income accounts:Record the earnings of the business (e.g. sales)  Asset Accounts:Record what is owned by the business  Liability Accounts:Record what is owed by the business, including to the owner

(capital) 

Ledgers and Accounts To debit an account – an entry is

recorded on the left hand side To credit an account – an entry is

recorded on the right hand side

The accounts are kept in a book called a ledger.

 

Useful Definitions Book-keeping - recording financial

information Accounting (financial)

Uses information from book-keeping records to prepare financial statements

Useful Definitions Financial statements

- The profit and loss account and the balance sheet

Cost accounting How much does something cost to

produce Management accounting

Uses cost accounting to forecast, control and evaluate costs

Business Organisations

Types of business Private

Sole traders, partnerships, companies, clubs

Public sector Government bodies and nationalised

industries

Sole Trader One-man business unit Capital is raised by the private

resources of one person May also include borrowings Personally liable for all debts

Parternerships Anything from 2 to 20 partners Each partner contributing private

resources May also include borrowings Personally liable for all debts of

business Subject to partnership agreement

Limited Companies 2 types – private (LTD) or public (PLC) Limited companies have limited liability. This means that in the event of a

companies collapse, shareholders are protected against the debts of a company. They may lose their paid-up capital, but nothing more. This is not the case for sole-traders or partnerships.

Private Limited Company (LTD) No restriction to number of shareholders But can only sell shares privately (without

advertising) This in itself will limit the number of

shareholders Generally see shares of limited companies

being sold within boundaries of families,friends and business acquaintances

Public Limited Companies (PLC) Can issue a prospectus (invitation to

the public to buy its shares) Shareholders then become part-

owners of their companies. They receive dividends from

company profits Shares may increase or decrease in

value

Sources of Finance Owners capital Loan capital Debentures Profits Leasing/ hiring of fixed assets Creditors Government

Owners Capital Resources put into the business by

the owner Limited companies have

shareholders For PLC – authorised capital – how

much it can raise

Owners Capital The shares issued and purchased by

shareholders are known as issued and paid-up capital

This may be less than or equal to the authorised capital

Classes of Shares 2 types of shares ordinary and

preferential Ordinary shares: most common, often

referred to as equity. Directors decide what is paid out as

dividends and how much they want to keep in the company.

Interim and final dividends Ordinary shareholders paid last!

Preferential Shares Fixed rate of dividend (e.G 10%

preferential shares) Cumulative preference shares –

allows arrears of dividends to be paid

Participating preference shares – may allow an additional bonus (if ordinary dividend is higher)

Rights Issue Where existing shareholders are

invited to buy the new issue first – being offered in proportion to their existing shareholding

Generally offered at a favourable price

Loan Capital Loans – short–term (less than 1 year),

medium-term (2 to 5 years), long-term (up to 20 years)

Short-term – generally used for day to day running of a business (eg. Overdraft)

Medium and long-term – purchase machinery, buildings, etc

Generally provided by banks

Debenture Issues Debentures are loan capital - issued by

companies for the purpose of financing over a specific period of time (e.G 5 or 10 years)

Interest is then paid to the debenture holder at a fixed percentage of the nominal value of the stock even if no profits are made

Normally secured against assets of company

Debenture Issues Debentures are sold in blocks of €100 and

this amount is repaid to debenture holder when the debenture matures

Debentures can also be sold on the stock exchange

Value is not determined by the future profts of the company but of interest rates available elsewhere

Profits Profits can be ploughed back into

the business to finance future financial needs

Companies who retain their profits can transfer them to what is known as a P and L reserve, that is to leave it to accumulate in the profit and loss account

Leasing/ Hiring Fixed Assets Hire purchase: expensive form of credit.

Asset only becomes legal property of the business when last payment is made.

Leases – 2 types – operating and finance Operating lease – merely a form a rental.

Rental amount deducted from profts Finance lease – depreciation and interest

charges can be written off against profits

Factor Finance Pass all trade debts to a factoring

company who pay the company a major percentage of the debts immediately and the balance when the debts are collected. (Done for cash flow purposes)

Factor Finance Factoring company charges interest

on the sum advanced until the debts are paid plus an administration fee for the service

‘Without recourse’ – often factoring company bears any loss as a result of bad debts

Creditors Important source of short-term

finance Credit facilities granted to a

company are effectively an interest free loan

Short-term – generally 30 days

Governement Funds Offer financial support in the form of

grants Example, fingal county enterprise

board, IDA

Role of Accountant Collecting & recording financial data Organisation of this data into books Control of cash resources Preparation of financial statements Assessment of financial performance Role of auditor Preparation of budgets

Role of Accountant Preparation of costing estimates Preparation of cash flow Negotiations with banks/ other

sources of capital Role of financial advisor/ consultant

Accounts Office Typical rolesSales ledger – recording customers recordsPurchase ledger –suppliers (accounts

payable)Cashier – bank statements/ recomciliationsPayroll – PAYE, etcCredit controller – outstanding debts

The Auditor Independent assessment of accounts by

accounting professional The purpose is to ensure financial

statements give a TRUE and FAIR VIEW Audtors report produced – for PLC

included in annual report Can ‘qualify’ a report if not satisfied with

accounts or there is insufficient information available to him

Introduction to Financial Statements

Trading AccountSales €500Less Cost of Sales:

Purchases €100 Opening Stock €50

€150Less Closing Stock (€20) (€130)GROSS PROFIT €370

Trading Account

SalesLess sales returns

Purchases Less purchases returnsLess drawings

Trading Account

Only other amounts that need to be taken into the trading account are:

Carriage inwards Customs duties Import duties

Trading AccountSales (less returns €20) €480Less cost of sales:Opening stock €100Purchases €100Less returns (€25) €75Add carriage-in €20Add import duties €10

€205Less closing stock €105 €100Gross profit €380

Trading Account Always trading account for year

ended ….. eg. 31/12/2005

Profit and Loss Account

Gross profit (from trading account)Add incomeLess expenses

= Net profit

Income

Money received by the business Discount received Dividends received Interest received Rent received

Expenses Wages Rent Rates Light and heat Advertising Discount allowed Carriage outwards

The Balance Sheet Statement of assets, liabilities and

capital as at a particular date Comprises of:

Fixed assets Current assets

Capital Long-term libilities Current liabilities

Fixed Assets Assets which are permanent in

nature Vital to the operation of the business Generally last longer than 1 year Examples

• Land• Buildings• Machinery• Motor vehicles

Current Assets Assets which are temporary in

nature. The amounts change frequently

Examples• Stock (closing stock)• Debtors• Bank• Cash

Capital Total investment by the owner in

this business Made up of capital plus net profit (or

minus net loss)

Long-term Liabilities Debts due by the business Repayable at a date that is more

than one year from the date of the balance sheet

Example• Mortgage• Five year loan

Balance Sheet LayoutFixed Assets 500Current Assets 200Less Current liabilities 100 100

600Financed by :

Capital 100Add Net Profit 200 300Long term Liabilities 300

600