Introduction to Finance Assignment Help
What is accounting?
Accounting is the art of recording, summarizing, analysing and reporting financial transactions. An accounting system can be a simple useful check register, or, as with modern automated enterprise resource planning systems, it can be complete record of all the activities of the business, allowing the analysis of business trends and providing understanding to future prospects.
The outcome of the accounting process is a group of financial statements that reflect an organization’s financial position, liquidity, and profitability, regularly financial statements are prepared to reveal the financial positions and the outcomes for operations.
Cash flow is to show incoming and outgoing of the cash in business, representing the operating activities of a company. In accounting, cash flow is the difference of opening balance and a closing balance of end of a period. Cash flow can be increased by: selling more goods on profit, selling assets, paying back loans and bills on time, increasing selling price of a product, buying products in low prices, bringing in more equity, taking a loan etc.
Trial balance is a list of a debit and credit balances in all account at end of the accounting period if the total debit equals to the total credits before making closing entries. It is a basis of making draft financial statements. “The trial balance is part of the financial reports based on double entry bookkeeping, as in accounting for every debit there is a credit, opposite and equal for your accounts to balance.” (E-conomic.co.uk, 2014)
The trial balance will consist of four columns:
- The nominal or general ledger account number
- The description of that account number
- A debit balance column
- The credit balance column
Profit and loss statement
It is a summary of a financial performance of a business. It may be of monthly, quarterly, annually. It reflects the past performances of a business and it reports is often used by small businesses to keep track of their business to see how it’s performing. Profit and loss statement summaries the income for a period and subtracts the expenses incurred for the same period to calculate profit and loss for the business.
These financial statements are crucial when it comes to management accounting and are particularly useful for managers within a firm to aid them with day to day running of the company and managing resources. Management accounting is about the tactics and the techniques hat managers use in order to keep the company running including fixing prices, controlling costs, budgeting, etc.
A balance sheet is a statement of the total assets and liabilities of an organisation at a particular date – usually the last date of an accounting period. Another way of explaining the balance sheet is through the equation Assets = Liabilities + Capital. Assets are the possessions owned by the business and can be separated into 2 different categories, current assets and fixed assets.
Describe each element of capital and revenue, giving examples of each; explain the differences between them.
When the benefits of expenditure on the fixed assets like machinery, lands, building are available over number of years, such expenditure is known as capital expenditure. Capital expenditure is money used to buy items such as: fixed assets, Intangible assets.
Revenue expenditure is money used in day to day-on business like: Premises costs, administrative costs, staff cost, purchases cost, finance cost etc.
Revenue and capital expenditure are aspects of business management that seem very similar at first. Both revenue and capital expenditure are concerned with spending money to help a business survive and grow. The key difference between the two is the intent of the expenses and where the money goes. Revenue is for short-term costs that are not used afterwards to make the company grow, such as repairs. Capital expenditure is for long-term assets, such as new vehicles or software, which will be used to make the company stronger.
Revenue expenditure is money being spent immediately for short-term purposes. These are expenses linked with assets, such as repair, that may or may not increase the lifetime of the given asset. Revenue expenditure is more often associated with day-to-day costs the company accrues through its life cycle.
Capital expenditure is money being spent on assets that will increase the company’s ability to gain or produce profit or operate at a higher performance level example: new software, vehicles, machinery and tools that will be used for at least 12 months are considered capital expenditure. Capital expenditure, unlike revenue, is looked at more as an investment than a cost, because it is being used to strengthen the company so it can do better business.