C O M P A N Y A C C O U N T S Lesson - 1 / 1 Dave Glynne (ACCA. BAAF, PgDip Comp) Duration – 5.5 hours Look forward to.. Seeing how accounts are created Breakeven, mark-up, margins Reviewing financial information Videos and quizzes Questions & understanding Understanding it!
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COMPANY ACCOUNTS
Lesson - 1 / 1
Dave Glynne (ACCA. BAAF, PgDip Comp)
Duration – 5.5 hours
Look forward to..
Seeing how accounts are createdBreakeven, mark-up, marginsReviewing financial informationVideos and quizzesQuestions & understandingUnderstanding it!
Loos Eating
Breaks Q & A
Safety & Safeguarding
Exits
RULES
&
INFORMATION
Phones support
Learning Outcomes
Today’s Aim
To be familiar with the main aspects of smaller company accounts and their preparation
AIM
&
OBJECTIVE
Recognise a balance sheet and profit & loss
Explain different sections of accounts
Explore financial performance and analysis
Sole Trader – can do single entry accounting
Partnership & LLP – full double entry accounting
Limited company and PLC – full double entry
Group (> 1 combined Co.) – group accounting
Club and Charity - income and expenditure
DIFFERENT TRADING ENTITIESTRADING
ENTITIES
Companies House & HMRC – filing accounts and CT600
Safeguard assets – fixed assets and schedules
Prove liquid balances – bank and other reconciliations
Control working capital – debtors and creditors
Manage debt - loans and investors
Review performance – turnover and profitability
Management reporting – comparatives and forecasts
ALL THAT EFFORTWHY HAVE ACCCOUNTS?
PURPOSE
OF
ACCOUNTS Selling your business – reliable results and assets
Another one of Dave’s Maths Moments!Discuss
Analyse
Valuate
Explain
A VAT RULE• The value must be shown if over £250• Else, a simplified Vat invoice is optional
Imagine no VALUE ADDED TAX on invoices
Alissa buys a £240 computer for the businessVat is not shown separately but stated as 20%
Q1: How much Vat can be reclaimed? £_______
Q2: Show Net, Vat, and Gross
Net £_______ Vat £_______ Gross £_______
CHALLENGE
MATHS
MOMENT
WHAT IS IN FILED COMPANY ACCOUNTS?
Balance sheet – assets & liabilities, shareholders valueReveals assets, debts, and wealth at a point in time
Profit & loss – turnover, COS, overheads, profitShows the annual outcome from business activities
Comparatives – year on year valuesCompares performance especially for P&L
Other – Sign off, commentary and notesDirectors’ responsibilities and detail of accounts
For the year ending [your company’s year end date], the company was entitled to exemption from audit under section 477 of the Companies Act 2006 relating to small companies.
The members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476.
The directors acknowledge their responsibilities for complying with the requirements of the Act with respect to accounting records and the preparation of accounts.
These accounts have been prepared in accordance with the provisions applicable to companies subject to the small companies’ regime.
FILING
ACCOUNTS
Cont.. WHAT’S IN FILED COMPANY ACCOUNTS?
Turnover is below £6.5m
Gross assets do not exceed £3.26m
SMALL COMPANY EXEMPTION
File your own accounts bysatisfying 2 of 3 criteria
Used for credit sales to monitor debts and record turnover, vat,
and receipts
DEBTORS’ LEDGER
Used for credit purchases to monitor payables and record
costs, vat, and payments
CREDITORS’ LEDGER
Bank accounts are the heart and arteries of a business Have one ledger account for each real bank account Reconcile each one to its bank statement Only input actual bank transactions into the ledger
BANK ACCOUNTS & RECONCILIATION
In September both balances are the same as there were no differences.
Here the bank statement shows £75 end of August. This differs to the cash book’s (£125) overdraft. After reconciling we noticed a cheque was issued for £200 which cleared in September.
One of Dave's Maths Moments!Discuss
Analyse
Valuate
Explain
Homes for hammers
Craig and Nina buy a house for £72,000
They have to renovate and may sell or rent it. To rent, they need an annual return on investment of 10%.
Q1: Offered a rent of £700 pcm, what’s the renovation budget?£______________
Q2: Think of two other factors that should be considered?
1______________ 2______________
A
MATHS
MOMETE
Green is ‘good guy’, orange is ‘bad’DEBITS
AND
CREDITS
Balance Sheet to Balance Sheet JournalBank Journal
BALANCE SHEETDebit Credit Before After
Trade Creditors 2,700 1,950Trade Creditor a/c 750 Supplier B
Supplier A 1,000 1,000Bank Current a/c (750) Supplier B 750 0
Supplier C 800 800Supplier D 150 150
BALANCE SHEET
Bank Current A/c
Balance 2,500 Debit balance
Supplier Ledger (750) Credit entry
New Balance 1,750 Debit balance
JOURNALS
Bank JournalPROFIT & LOSS
Debit CreditOverhead Expenses
Rent Expense a/c 750Rent 750
Bank Current a/c (750)
BALANCE SHEET
Bank Current A/c
Balance 2,500 Debit balance
Rent (750) Credit entry
New Balance 1,750 Debit balance
Balance Sheet to Profit & Loss Journal
JOURNALS
The best way to remember debits as (+) and credits as (-), is to think of the Bank account.
One Way to Remember Double Entry
Then create a positive entry in Trade Creditors. The latter is a good guy as it reduces a liability.
If we pay a Trade Creditor…Credit the bank a/c on the Balance Sheet - (a bad-guy as it reduces our bank balance).
TOP
TIP
Another one of Dave's Maths Moments! Discuss
Analyse
Valuate
Explain
A JUG’Ling Act.
Die Hard 3Bruce and Samuel had a problem to solve.Can you help them?
You have 3 minutes to get exactly 4 litres into the 5 litre jug.
Step 1: Hint: Fill the 3 and pour it into the 5Step 2:…………………………………………..
The COA is available accounts, each one belongs to a section
VAT is merged to create one balance
Current means within on year
Choose a section based on the likely balance, most are obvious
CHART
OF
ACCOUNTS
A TRIAL BALANCE
A TB is a list of those accounts used in the COA.
Accounts belongs to either the Balance Sheet or Profit & Loss.
These will always add to zero as each group of logical Debits (+) has an equal and opposite value of Credits (-).
TRIAL
BALANCE
TRIAL BALANCE (TB): Year end 30/09/2015, as at 30/06/2015
0060 Office Equipment £20,000
0065 Cumulative Depreciation -£12,000
1220 Bank - Current -£8,913
2050 Payroll Taxes -£1,188
2055 Trade Creditors -£2,100
2070 Directors Loan -£1,000
3010 Share Capital -£100
3030 Revenue Reserve £91,584
4010 Turnover -£185,900
5010 Cost of services £48,300
6029 Depreciation charges £3,000
6080 Admin & Office £15,000
6074 Salaries £33,317
£86,283
-£86,283
Balance Sheet
Profit & Loss
Always zeroTRIAL
BALANCE
Clues: Answers:
BALANCE SHEET OF XYZ LTD Put correct number in each box
As At 31-Dec-2015 Cash at Bank
1 Equipment lasting a number of years Trade Debtors
2 SECTION (sum of 3,4,5) Current Liabilities3 Where we put our money4 For recording sales invoices and receipts Fixed Assets5 Other persons who owe us money
Trade Creditors6 SECTION (sum of 7,8)7 For recording purchase invoices and receipts Revenue Reserves8 Other persons who owe money to
Current Assets9 Calculation: Shows liquidity
Sundry Creditors10 Calculation: Net of all liabilities and assets
Sundry Debtors11 The owners investment12 All profits to date Shareholders equity
13 What shareholders own Total Net Assets
Issued Share Capital
Net Current Assets
e.g. £100 in shares + £999,900 revenue
usually future lease and loan payments
Net Book Values (NBV) including property, plant, and
equipment
BALANCE
SHEET
Profit from trading:
Overheads:These can be fixed or variable.The categories are groups of accounts best suited to the business
Profit before tax and dividends:
THE PROFIT & LOSS ACCOUNT
Turnover is the value of sales when an invoice is issued. It’s net of vat and if trade given. Markets include goods and services.
Cost of sales reveals the direct expenses in creating sales. It involves purchases of goods for resale, and stock count and valuation.
Example of 2 stock pricing methods
COS applies to service industries as well - being mainly payroll and contractor costs
PROFIT & LOSS
Opening stock £11,000
Purchases £40,100
Closing stock (£15,795)
Cost of sales £35,305
GROSS
PROFIT
Two mainstock pricing methods
Cost of sales also applies to services being mainly payroll and contractor costs
Turnover is the value of sales when an invoice is issued. It’s net of vat and if trade given. Markets include goods and services.
Cost of sales reveals the direct expenses in creating sales. It involves purchases of goods for resale, and stock count and valuation at year end.
Example of 2 stock pricing methods
COS applies to service industries as well being mainly payroll and contractor costs
PAYROLL & COMPANY TAXATION
The initial cost to the Company is salary plus Employer’s NI;£50k + £5.8k = £55.8k
PAYROLL COST
Wages + ER NI £55,802
Corp Tax (20%) (£11,160)
Cost after Tax £44,642
Wages and salaries are Tax deductible whereas Dividends are not
Task: Show the £9,627 PAYE calculation
SALARY or DIVIDENDS? Salary Vs. Dividends Salary Dividend
Profit before salary/div. £50,000 £50,000
Gross Pay (£44,900)
Employer’s NI (£ 5,100)
Profit before tax £ - £50,000
Corporation Tax (20%) £ - (£10,000)
Profit after tax £ - £40,000
Dividends £ - (£40,000)
Retained earnings £ - £ -
Analysis Salary Dividend
Take home income (A) £33,185 £40,000
Payroll cost to Co. £50,000
Corporation Tax £ - £10,000
Effective cost (B) £ 50,000 £50,000
Percentage (A / B) 66% 80%
Dividends can only be paid if there are cumulative taxable profits
Costs are only tax beneficial if there are taxable profits
Smaller firms need to consider directors and the company as a unit.
Also consider: NI payments and state pension, minimum wage legislation, tax bands, other benefits, employing family
Improving the menu means 50% cover Mon –Thurs.
Now, with 96 customers on average p/w, the fixed overheads are covered.
The next move is to get a salary for yourself.
Suppose you’re the chef! Business is not about just earning an ordinary salary. You also need a reward for the extra risk, stress, and hours.
Self-employment is a battle of wits and pride. Be carful what you wish for and always have an escape plan.
Note this restaurant has potential to earn £356 p/w by just increasing covers to 100% each day.
Break Even Analysis
After the Action:
BREAKEVEN FINANCIAL MODEL - Restaurant example:
Covers Avg Prices excl. Vat20 Starter Main Dessert Drinks All
MARK-UP - MARGIN - PROFIT - CONTRIBUTIONWHAT’S THE DIFFERENCE?
These are regularly confused by analysts and business experts alike. Mark-up is often used as pricing mechanism used by the business. If the mark-up is 100% you multiply the cost by 2, similarly if 50% it’s [Cost * 1.5].
1. Mark-Up is good for pricing
2. Margin is good for analysis
3. Contribution is good monetarily
Cost £100With M-U =
£200Vat rate 20%With VAT =
£240
Margin is used to assess the profitability of sales once you know the sales value. If we know that sales are £180,000 and the margin is 25%, we can say that profit contribution is £45k and the cost of sales is £135k.
% £Mark-up 100%
Margin 50%
Contribution £100
We buy goods for £120 inc. VatWe use a mark-up of 100%
What do we sell it for?
PRICING
&
PRICING
Costs usually impact the accounts via invoices What if an invoice is missing at the period end? E.g. an electricity bill dated 28 Feb relates to the last quarter One month’s cost is missing from December’s accounts Fix this using an Accrual’s Journal (exclude vat)
ACCRUAL JOURNALS – Year end is 31-Dec.
Here, the energy bill is for £3,150 (Vat £150):
Invoice entered in the accounts: 28-Feb-2015Debit Energy expense a/c P&L £3,000 DRDebit Vat a/c BS £150 DRCredit Trade Creditors BS (£3,150) CR
Accrual posted at the Year End: 31-Dec-2014Debit Energy expense a/c P&L £1,000 DRCredit Accruals a/c BS (£1,000) CR
Reversal of Accrual 01-Jan-2015Debit Accruals a/c BS (£1,000) CRCredit Energy expense a/c P&L £1,000 DR
PREPAYMENT JOURNALS – Year end is 31-Dec.
A current invoice partly relating to the future E.g. Business rates billed annually in advance Invoice for £12k dated 1-Nov-2014 Fix this using a Prepayment’s Journal (exclude vat)
Invoice entered in the accounts: 01-Nov-2014Debit Rates expense a/c P&L £12,000 DRCredit Trade Creditors BS (£12,000) CR
Prepayment posted at the Year End: 31-Dec-2014Debit Prepayments a/c BS £10,000 DRCredit Rates expense a/c P&L (£10,000) CR