Financial Records

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Financial Records

• Task 3 of the IVA

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The Task
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What is an Invoice ?

• An invoice is a detailed list of goods shipped
  or services rendered, with an account of all
  costs an itemized bill ( from www.answers.com )

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What should an Invoice show?

• Name and details of the supplier and the
  customer.
• Details of the goods/services
• Price before VAT
• VAT payable
• Price including VAT
• Date
• Suppliers VAT registration number

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Invoice may also show

• Account number
• Order number
• Date payable
• Any discounts
• An invoice is a bill sent by a company to a
  customer to show what they have ordered and how
  much it costs and when it needs to be paid by
  Kirsty Bates
• An invoice is an itemized bill produced by the
  supplier to the customer, both addresses should
  be on the invoice/ It contains information such
  as detail of the items, price before VAT, VAT
  payable and Total payable including VAT. The bill
  should be paid on time and filed Laura Jurkowski

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Recording Income and Expenditure

• Use of Cash Analysis to record income and
  expenditure
• Meets the requirements of the Companies Act 1989
• companies shall keep accounts which are
  sufficient to show and explain their
  transactions
• Cash Analysis is a record of all transactions,
  showing VAT , showing the categories of the
  income or expenditure. NDAM2

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Recording Profit and Loss

• Use the Trading and Profit and Loss Account

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Calculating VAT

• Definitions
• VAT Value Added Tax This is added to the price
  of all goods and services, except books,
  childrens clothes and food. VAT standard rate is
  17.5.
• Excluding or EX VAT The price before Value
  Added Tax added
• Including VAT or inc VAT The price after VAT has
  been added.

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To find the VAT to add to a price

• Ex VAT Price x 17.5 100 VAT payable
• Find the VAT to add to these prices
• 150
• 200
• 250
• 300
• 350

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To work out a price inc VAT (given the price
before VAT)

• Price ex VAT x 117.5 100 Price inc VAT
• Find out the inc VAT price from these ex VAT
  prices
• 150
• 200
• 250
• 300
• 350

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To find the VAT paid, given an inc VAT price

• Price inc VAT x 7/47 VAT paid
• Find out the VAT paid on these inc VAT prices
• 117.50
• 176.25
• 235.00
• 293.75
• 352.50
• 411.25

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To find the ex VAT price from an inc VAT price

• Price inc VAT x 40/47 Price excluding VAT
• Find the ex VAT price from these inc VAT prices
• 117.50
• 176.25
• 235.00
• 293.75
• 352.50
• 411.25

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• Why the formula 40/47 ?
• It is a simplification of 100/117.5, which you
  can also use.

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Trading and Profit and Loss Account

• Summarises the trading over the year
• Calculates the Net Profit before tax
• Includes all costs, including an allowance for
  depreciation (annual cost of equipment etc)

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TPL

• Is adjusted for stock left over from last year (
  called opening stock)
• This stock is effectively bought from last
  years account, and shown as a cost
• Is also adjusted for stock left unsold at the end
  of this year
• Closing stock is sold to the following year

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TPL

• Important to distinguish between Gross Profit (
  which is Not profit) and Net Profit.
• In agriculture we use the terms Gross Margin, and
  Net Farm Income

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What is a balance sheet?

• A statement of all the business owns, and
• All the business OWES
• At a moment in time

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In a balance sheet, the two sides balance
To make them balance we have to add a figure,
which is the NET WORTH of the company
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What the business OWNS

• Called Assets
• Divided into Current Assets
• And Fixed Assets
• Current Assets are things which can easily be
  turned into money
• Fixed Assets are things which are worth money,
  but are not likely to be sold in the short term

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What the business OWES

• Called Liabilities
• Divided into Current Liabilities
• And Long term liabilities
• Current liabilities are things you will have to
  pay for soon
• Long term liabilities are things you are not
  expecting to pay for in the short term

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Examples of Current Assets

• Cash in the bank
• Cheques to cash
• Debtors about to pay you
• Stock about to be sold
• Cash in hand

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Examples of Fixed Assets

• Land
• Buildings
• Vehicles
• Equipment
• Office furniture

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A note on terms

• Debtors are people who owe you money
• Creditors are people who you owe money to
• Liabilities are things you have to pay for
• Assets are things of value
• Net worth, or Capital, or Equity is what the
  business is worth

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Examples of Current Liabilities

• Invoices to pay (creditors)
• Bank overdraft
• Credit card debt
• Wages due to be paid

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Examples of Long Term Liabilities

• Mortgages
• Long term bank loans
• Finance arrangements
• Pension Scheme
• The Capital Investment made in the business by
  the Owner
• Because the business OWES this capital to the
  owner.. This is the net worth..

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Old fashioned Balance Sheet

• ASSETS
• Cash at Bank
• Debtors
• Stock
• Land
• Equipment
• Total Assets

• LIABILITIES
• Creditors
• Overdraft
• Bank loans
• Mortgages
• CAPITAL
• Total Liabilities

Balancing factor
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Modern layout of Balance sheet

• Current Assets
• Plus
• Fixed Assets
• Minus
• Current Liabilities
• Minus
• Long term liabilities
• Equals Capital value, or Net Worth

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Assets
Added net worth
Liabilities
Net worth
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Task 3c

• Why are financial records important ?
• Complies with Companies Act 1989
• Ensures HM Revenue and Customs can verify
  accounts
• Corporation Tax is calculated from the accounts
• VAT can only be reclaimed if the supporting
  accounts are available

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The business benefits

• Control over spending
• Helps make decisions
• Recognise successful areas of business
• Bad debtors spotted quickly
• Keep control of risk
• Make sure all the bills can be paid
• Identify fraud

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Who wants to see your accounts ?

• Bank ( to see if you are safe to lend to)
• Shareholders ( to see that their investment is
  being wisely managed)
• HM Revenue and Customs ( to work out your
  Corporation Tax)

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Accounting conventions

• Monetary Measure
• Historical cost
• Consistency
• Materiality
• Prudence
• Objectivity

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Depreciation

• The loss in value of an asset from one year to
  the next
• Effectively, the cost of ownership
• Remember, some assets dont lose value..
• An appreciating asset is one which gains value
  from year to year.
• ( like an antique)

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Painting goes up in value, an appreciating asset
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Depreciating asset..
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Example of Depreciation

• I buy a truck for 10,000
• After a year it is worth 8,700
• Therefore the depreciation this year has been
• 1,300

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There are two normal ways of calculating
depreciation

• Straight-line
• Diminishing value
• The diminishing value method is the one used by
  accountants,
• The straight-line method is useful to know, for
  budgeting

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Diminishing value

• Tractor, bought in 2000 for 22,000
• Diminishes in value by 20
• 22,000 x 20
• 4,400
• This is the annual depreciation for 2000-2001
• The new value of the tractor is now
• 17,600

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Try tracking the depreciation of this tractor
over the next 4 years
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Try tracking the depreciation of this tractor
over the next 4 years
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Try tracking the depreciation of this tractor
over the next 4 years
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Try tracking the depreciation of this tractor
over the next 4 years
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Diminishing value

• Using this method, you get a value reducing by a
  smaller amount each year.
• The item loses most of its value in its first
  year, which is true of most things
• The asset value will get gradually smaller, but
  wont ever completely disappear

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Straight-line depreciation

• This is calculated for the whole life of the
  asset.
• The purchase price (22,000)
• Minus
• The Resale value after 5 years ( perhaps 7000)
• Divided by the number of years

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• 22,000 7,000
• 5 years
• 15,000
• 5
• 3000 per year

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The straight line method

• It shows the item losing less money initially,
  compared with the diminishing value method
• But later, the depreciation is greater
• Simple approximation only

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Why do we need to calculate depreciation ?

• Depreciation of our assets is allowable against
  tax
• Depreciation is itemised on the Trading and
  Profit and Loss Account
• Get it wrong and you could pay too much tax !

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Is Depreciation a real cost ?

• Yes
• Depreciation is a measure of the real loss in
  value which has been sustained..
• If we sold the asset after 3 years, it would be
  worth less than new, and this money is a cost to
  the business, which we identify as
• Depreciation
• Always remember, some assets Appreciate instead
  of depreciate..

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Insurance

• The sharing of risk
• Legally required
• Employers Liability Insurance
• Public Liability Insurance
• Third Party Vehicle Insurance
• Professional Indemnity Insurance

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Additional Insurance

• Fire and theft insurance
• Professional Indemnity Insurance
• Building Insurance
• Stock Market hedges

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Key Points

• The payment for insurance is called
• The Premium
• Premiums are calculated on the basis of risk the
  higher the risk, the higher the premium
• Incentives like no-claims bonus encourage us
  not to claim

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Life Assurance

• Based on actuarial tables which use statistics on
  life style and age to predict when the client
  will die..
• Since you pay each year, the longer you will
  live, the more you will pay, so the lower the
  premiums..
• The earlier you are expected to die, the less
  premiums you will pay and the earlier the company
  will have to pay out.. So expect the premiums to
  be high ..