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STUDIES
CHAPTER 7 BUSINESS ACCOUNTING
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BALANCE SHEETS
Delivery notes these needs to be signed by the customer to confirm that the
order has been received.
Invoices these are the requests for payment sent by the supplier.
Statement of account a statement that each month the supplier will send to
his customers.
Remittance advice slips these are slips issued to make sure the customer
isnt charged again for the invoices he has already paid.
METHODS OF MAKING
PAYMENT
Debit card these work the same way as credit cards but
instead of credit being accumulated, the money is
transferred directly to the the sellers account.
It shows the difference between the COSTS OF GOODS SOLD and the
SALES REVENUE
IMPORTANT:
Cost of goods sold does not have to be the same as the total value of
goods bought by the business
Gross profit does not make any allowance for overhead costs or expenses
In a manufacturing business the direct labor cost and the direct production
costs will be deducted from the gross profit before arriving at the GROSS
PROFIT TOTAL
The gross profit is not the final profit of the business as all the expenses
have to be deducted
BALANCE SHEETS
They are very different from the profit and loss account.
The profit and loss account shows the income and expenses of a business over a
period of time
The balance sheet shows the value or worth of a business at a particular moment in
time
ASSETS are those items of value that are owned by the business
Fixed assets (Land, buildings, equipment and vehicles) they are likely to be kept
by the business for more then a year, most of the fixed assets depreciate over time
Current assets (cash, stocks and debtors) they are only held for a short period of
time
EXPLANATION OF BALANCE
SHEET TERMS
Working capital (aka as net current assets). It is used to pay short term debts
Working capital = Current assets Current liabilities
Shareholders founds is everything that is invested into the business by the owners
of the company
Share capital is the money put into the business when the shareholders bought
newly issued shares
Profit and loss reserves are retained profits from current and previous years
ANALYSIS OF PUBLISHED
ACCOUNTS
LIQUIDITY is the ability of a business to pay back
RATIO ANALYSIS OF
ACCOUNTS
PERFORMANCE RATIOS
and,
LIQUIDITY RATIOS
PERFORMANCE RATIOS
RETURN ON CAPITAL
EMPLOYED
This is calculated by the formula
LIQUIDITY RATIOS
CURRENT RATIO
and
CURRENT RATIO
DISADVANTAGES OF RATIO
ANALYSIS
Ratios are based results collected on the past and
inflation
Different companies might use slightly different
accounting methods
GO BACK TO RATIO ANALYSIS OF ACCOUNTS