Unit 4 Accounting and Finance GCE A2 Business Studies.
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Transcript of Unit 4 Accounting and Finance GCE A2 Business Studies.
Unit 4 Accounting and Finance
GCE A2 Business Studies
Overall Objectives
You are required to;– Gain an understanding of Accounting and Finance
in an integrated context– This builds on the what you learnt last year, in Unit 1– You should acquire the “ability to see how financial
concepts such as cash flow, gearing, liquidity and profit are affected by factors outside the control of individual firms, such as the economy and the degree of competition and how firms strategies should reflect this”
Today’s objectives
Capital expenditure and revenue expenditure– Understanding the implication of this distinction for
the profit and loss account and balance sheet (including depreciation).
Definitions and assumptions
Revenue spending– Expenditure on current assets and expenses– Things that are used once– E.g. Stock, electricity bills, rent
Capital spending– Expenditure on fixed assets– Things that are used repeatedly– Premises, machinery, vehicles
Definitions & Assumptions (2)
Depreciation– The accounting process concerned with the fall in
the value of the fixed asset over time– To maintain a true and fair view of the state of the
business in the accounts, this fall should be reflected in the book value of the assets
Revenue Spending
Revenue spending/expenditure is concerned with the money spent on a day to day running
There are usually 3 categories:– Items that will be used only once (paper, printer toner etc– Items that will be used up in the very near future (stock of
components for an assembly line)– Items that have been used before they are paid for (rates, advertising)
These items only have a short term impact on a firm, however they have a direct influence on profits
The cost of stock bought for resale and the money spent on advertising is taken from the firm’s revenue to calculate the profits of the firm.
Capital spending
Capital spending/expenditure is concerned with the the money spent on its long term operations
One year is the difference between the long term and the short term
These assets are bought by the firm with the intention of being used for several years
Capital spending does not have a direct influence on a firm’s profits
Revenue & Capital spending examples
Spending Capital/Revenue Explanation
Buying property Capital A long term asset for the business
Extending premises Capital For the long term use of a business
Repairs to premises Revenue
A one-off payment to maintain the business and its premises in a usable state
Wages & salaries Revenue A one-off payment for work done in the previous week/month
Buying a delivery van Capital
For repeated use by the business
Petrol for the van Revenue Petrol can only be used once then more must be bought
Goods bought for resale Revenue
They will be sold onto customers once
The effect of capital and revenue spending on the final accounts
Both capital and revenue spending will affect the financial accounts of a business
Revenue spending on short-term items will only affect one accounting period
Capital spending is accounted for over years of the expected lifetime of the asset
The profit & loss account shows the performance of a business over a period of time I.e. one year
The balance sheet shows the state of a business at a specific moment
The effect of capital and revenue spending on the final accounts (2)
Items which have been paid for and used up only affect one accounting period, so they appear on the profit and loss account for the relevant trading period
Therefore, revenue spending of £50,000 on staff salaries will be charged in full to the year’s profit and loss account
Items which a firm intends to keep and use over a long period of time (fixed assets) will appear on the balance sheet.
– With the exception of depreciation, these have no direct impact on the business’ profits for a particular period
– This is because they affect more than one single accounting period– If a firm spends £50,000 on a new shop premises, it will not show up
as a cost to the year’s profit and loss account, solely on the balance sheet
The effect of capital and revenue spending on the final accounts (3)
A firm buys a new factory to go alongside it’s existing plant and machinery
– The accounting profit for the year will no be affected– The capital spending of the firm has increased– The balance sheet will show an increase in the firm’s fixed assets– The purchase will need to be financed, therefore there will be an
equal change in the firm’s capital or long term liabilities– Once the new factory is being used, expenses such as power,
raw materials and wages will need to be paid. These will come off of the profit and loss account.
– It is expected that the extra revenue generated from the new factory will be sufficient to increase profit overall
Getting the balance right
It is important for managers to achieve the right balance between revenue and capital spending.
Too much capital spending could lead to a lack of funds to pay for revenue items needed to generate income
Too little capital spending may cause a firm to have revenue items that cannot be processed as the plant required is not available
Depreciation
Definition 4 Reasons why assets depreciate 2 methods of calculating depreciation &
formulae– Straight line method– Declining balance method
The effect of depreciation on accounts