Accounting and Finance Information.

Accounting and Finance​

Heres some information about Accounting and finance. This information may help you all. It's good knowlage to know when opening a business. I added a lot about Finance, and sources of finance (as that will be you're main goal when starting up/running a business.

ENJOY

Accounting – Process of accurately recording financial transactions for the purpose of preparing reports that summarise information over a period of time. The reports allow informed judgements and decisions to be made regarding the business.

Finance – Identifying and obtaining the sources of funds to start up and expand a business. It is also responsible for ensuring that excess funds are used effectively and that investments made by the business yield the maximum returns for shareholders.
Sources of Finance
Debt Finance

• Short Term
- Overdraft
- Trade Credit
- Credit Cards
- Commercial Bills

• Long Term
- Mortgage
- Debenture
- Term Loan

• Other
- Leasing (long term)
- Factoring (short term)
- Equity Finance

• Internal
- Initial Capital
- Retained Profits

• External
- Share Issue
- Venture Capital

Owners Equity

Internal Funds

Capital – Contributions made by the owner when the business is commenced or when extra funds are required. When establishing a business, owners contribute a certain amount of personal funds. This is known as initial or seed capital

Retained Profits – Owners are paid a percentage of profit however if not all profits are paid out these are called retained profits/earnings. These are those profits kept by the business which will be reinvested into the business – leading to growth and financial stability.

External Funds

Share Issue – If the business lists on the stock exchange and becomes a public company to gain extra funds, it is known as share capital. By listing/floating, the business increases the amount of capital it has to use in its business.

• Ordinary Shares – Most common and dividends are only paid out if a profit is made.

• Preference Shares – Uncommon, more expensive. Pays a fixed dividend regadless whether a profit or loss is made. Eg retiree who requires an income.

• Prospectus – A booklet prepared by a stock broker/ merchant bank which outlines the assets, growth potential, amount of debt.

Venture Capital – Money provided by firms or individuals for investment in young, rapidly growing companies that exhibit the potential to grow. Venture capital companies will mostly purchase equity which is long term. High risk due to the young age of business.

Debt

Short Term

Overdraft – Facility drawn up at a bank which allows a business to overdraw on its account for a short period of time when experiencing a cash deficit. Used when business is confident that their liquidity will improve. Expensive as interest rates are high.

Credit Cards – These can be used for purchases by a business. Generally there is an interest free period on purchases. To reduce the amount of interest paid, a business must repay the total amount at the end of the interest free period.

Trade Credit – This is credit issued by suppliers for goods that have been ordered but not paid for. This can be used by business for purchase of inventory required in the business and must be repaid within the credit period (30/60/90/120 days). It is the cheapest source of finance as it is interest free.

Bank (commercial) Bill – This is where a business writes a bill to a bank agreeing to repay the amount borrowed after a particular length of time. Bills can be traded on the secondary market.

Long Term

Mortgage – This is a loan where the security for the loan is a piece of property, known as collateral. If a business is unable to repay the loan the mortgager takes ownership of the property and can sell it to regain the money owed by the business.

Debenture – Loans from the public to businesses that are listed on the stock exchange. They are repayment guarantees issued in return for money provided by the public and include principle plus interest for a set period. These are secured against the assets of the business.

Others

Leasing – Involves the payment of money for the use of equipment by a lessee that is owned by another party the lessor.

• Operating Lease – shorter term than the life of the asset. Lessor is respobsible to maintain equipment. Lessee can update assets more easily by cancelling current leases and leasing new equipment. Eg leasing a car

• Finance Lease – Longer term which is equal or close to the life of the asset. Lessee is responsible for the insurance and maintenance of equipment. Lessee has option to purchase asset at reduced price (residual amount). Expensive to cancel.

Factoring – Involves the sale of debtors (accounts receivable) to a third party. It is a method of debt collection to increase cash in a business. The factoring company pays the business an amount equal to the value of the amount owed by customers minus a fee. Customers then repay the factoring company. This reduces any cash flow or liquidity problems however as the commission can be up to 3% it reduces businesses profitability.

​

Gearing

• Ratio of total debt to total equity used to finance a business. Eg a 75% gearing ratio means that for every $1 of equity, a business must repay 75c of debt.

• The higher the gearing, the more risky the

• Comparison with industry averages and past figures will indicate if gearing has increased or decreased

Key terms.

Revenue – The entire amount of income before any deductions are made. Generated from the prime function of the business.

Expenses – Amounts paid for goods and services that may be tax deductable.

Assets – Any item of economic value owned by an individual or organisation, that is of value and can be converted into cash.

Liability – An amount of money that a business has to pay to another business. What the business owes.

Budget – A detailed plan of income and expenses expected over a certain period of time. This provides the guidelines for spending.

Cash Flow – The balance of the amounts of cash being received and paid by a business during a defined period of time.

 

Why did you use that table? Did you make it yourself? Aside from that, this guide is pretty informative.

 

Woah i read that and i was like wtf lol. Didnt know any of this.

 

Yeh i made it myself, i thought it was a different way to show the advantages/disadvantages.

Well now you do

 

Good guide, learnt all this in the Accounting class that I take, you know what your talking about!
EDIT: I also noticed a mistake with spelling:
It's good knowlage to know when opening a - Found in the third sentence. It is spelt knowledge.