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

1/2

FILING

ACCOUNTS

Directors report – responsibilities, comments, approval

2/2

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

No more than 50 employees on average

File abbreviated accounts

Shareholders can demand an audit

Applies to most companies

Do self-assessment with no audit requirement

FILING

VIDEO

Companies house filing

Click below to see demo

TO DO OR NOT TO DO? THAT IS THE Q!TRANSACTION

QUIZ

AGREES TO PAY

1/2

QUIZ

ANSWERS

2/2

QUIZ

ANSWERS

Bank/Card/CashReceipts & Payments

Sales LedgerInvoice

Credit Note Receipt

Purchase LedgerInvoice

Credit NotePayment

General LedgerAssets, Liabilities,Sales, Expenses

Trail BalancePopulated chart of

accounts

Daily transactions95% of transactions

Period end Journals5% of transactions

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:…………………………………………..

Step 3:…………………………………………..

Step 4:…………………………………………..

See it on Die Hard

Step 5:…………………………………………..

Team members A:_____________ B:_____________

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

MAX Covers p/w 140 5.00£ 9.50£ 5.00£ 4.50£ Avg Take-up 50% 100% 65% 85%

Day Avg Cover take-up take-up take-up take-up ClienteleMonday 50% 5 10 7 9 10

Tuesday 50% 5 10 7 9 10

Wednesday 50% 5 10 7 9 10

Thursday 72% 7 14.4 9 12 14

Friday 75% 7.5 15 9.75 12.75 15

Saturday 100% 10 20 13 17 20

Sunday 100% 10 20 13 17 20

99

Cover Avg 71% 50 99 65 84

Turnover p/w 250£ 941£ 325£ 378£ 1,894£ A

Variable CostsMargins 65% 60% 65% 70% All

Cost of Goods 88£ 376£ 114£ 113£ 691£

Clean Linen 99£

Other 50£

Total Variable Costs 839£ B

Contribution 1,054£ C = A - B

Fixed Costs p/wFixed Costs 955£

Part Time Waitress step fixed ! 100£

Total Fixed Costs 955£ D

Loss per week 1-£ E = C - D

Avg Cont. Per Client 10.65£ Y / Z

Break even covers @ current mix & prices 99

B REAKEVEN

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

Reversal of Prepayment 01-Jan-2015Debit Rates expense a/c P&L £10,000 DRCredit Prepayments a/c BS (£10,000) CR

DEPRECIATION Charging fixed assets to the Profit and loss

Net Book Value:Depreciation in year 2 is based on £16,000 * 20%, and so on.Cumulative depreciation

reduces the fixed asset cost on the balance sheet. There’s an impact on the P&L each year.

Q: What is the NBV at the end of year 2?

Q: What is the P&L charge in year 2?

DEPRECIATION

FINANCIAL ANALYSIS & ACCOUNTING RATIOSDRILLING INTO FINANCIAL ACCOUNTS

Liquidity /Solvency

Controls around current assets and liabilities

Profitability /Cost control

Decisions around pricing and overhead commitments

Return on Assets/Investment

A view of return on investment

Liquidity and Solvency <=> Cash cycle and availability

Net current asset ratio: Current Assets / Current liabilities: Guide 2:1

Net asset (quick) ratio: CA excl. stock / Current liabilities: Guide 1.5:1

Trade Creditor days: (Trade creditors*365) / Goods bought: Delay payment

Stock turnover days: Cost of sales / Average Stock: Stock control

Days sales in Debtors: (Trade debtors*365) / Turnover: Credit terms

Cash Flow Life Cycle

Bank effect -£1,000 £1,500

Delay 41 Days

Stock Pay Sale Receipt

£1,000 -£1,000 £1,500 £1,50001-Jan 31-Jan 31-Jan 13-Mar

FINANCIAL ANALYSIS RATIOS

Example: Debtor's days

Turnover 100,000

Debtors balance 11,250

Debtors * 365 4,106,250

Average days 41

FINANCIAL ANALYSIS RATIOS

Profitability and Cost control

Gross Profit Margin: ( Gross profit / Turnover ) * 100 = X %: Contribution

Overhead Percentage: ( Overheads / Turnover ) * 100 = X %: Cost control

Task: List some things that impact GPM

Task: Consider the owner’s salary and the Dragon’s Den

Example: Improving profitability over time

Sales Gross Prof GM % Overheads OH % Net Profit NP %

2015 £900,000 £300,000 33% £250,000 28% £50,000 6%2016 £900,000 £300,000 33% £250,000 28% £50,000 6%2017 £900,000 £300,000 33% £200,000 22% £100,000 11%2018 £900,000 £350,000 39% £210,000 23% £140,000 16%

Task: List three large overhead costs

PROFIT PERFORMANCE CHART

Year Sales Gross ProfitGross Profit % to Sales

Overheads £Overhead %

to SalesNet Profit

Net Profit % to Sales

2015 £900,000 £300,000 33% £250,000 28% £50,000 6%2016 £900,000 £300,000 33% £240,000 27% £60,000 7%2017 £900,000 £300,000 33% £200,000 22% £100,000 11%2018 £900,000 £350,000 39% £210,000 23% £140,000 16%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

£0

£100,000

£200,000

£300,000

2015 2016 2017 2018

Overheads £

Gross Profit% to Sales

Overhead %to Sales

Net Profit %to Sales

FINANCIAL ANALYSIS RATIOS

Return on Owners Investment

Return on Capital Employed (ROCE):

Operating profit (before tax) / Net assets (shareholders equity)

Equates profitability of owners’ investment providing an investment comparative

This operating profit is earnings before interest and tax (EBIT)

Net assets = Total assets – Total Liabilities

Net Profit £79,099

TNA £535,482

ROCE 15%

Amounts taken from Abbreviated Accounts

Closing P&L – Opening P&L (The only information!)

Two Similar CompaniesWhich is best?

INDEX PROFIT & LOSS Co. A Co. B Best of both

1 Turnover £150,000 £150,000 £150,0002 Cost of sales £75,000 £83,000 £75,0003 Gross Profit £75,000 £67,000 £75,000

4 Operating Overheads £46,000 £40,000 £40,0005 Depreciation £5,000 £4,000 £4,0006 £51,000 £44,000 £44,000

7 Operating Profit £24,000 £23,000 £31,000

8 Taxation £5,800 £5,400 £7,0009 Dividends £10,000 £5,000 £5,000

10 Profit & Loss £8,200 £12,600 £19,000Formula

P&L Analysis Use index #

Gross Margin #3 / #1

Overhead % #5 / #1

Net Operating Profit % #8 / #1

BALANCE SHEET Co. A Co. B Best of both

INDEX

11 Fixed Assets 25,000 20,000 20,000

12 Current Assets13 Bank 8,100 15,200 default14 Stock 15,000 12,000 12,000 15 Trade debtors 28,000 22,000 22,000 16 Other debtors 4,000 4,000 4,000 17 47,000 46,100 53,200

18 Current Liabilities19 Bank overdraft 12,200 20 Trade creditors 23,700 29,500 29,500 21 Corporation tax 5,800 5,400 7,000 22 41,700 34,900 36,500

23 Net Current Assets 5,300 11,200 16,700

24 Long term liabilities 22,000 17,600 17,600

25 Total Net Assets 8,300 13,600 19,100

26 Capital and Reserves27 Called up share capital 100 1,000 100 28 Profit and loss account 8,200 12,600 19,000

29 Shareholders equity 8,300 13,600 19,100 Formula

Analysis Use index #

Currrent asset ratio #17 / #22

Quick asset ratio (#17 - #14) / #22

Debtors days 365 / (#1 / (#15 / 1.2))

Creditors days 365 / (#2 / (#20 / 1.2))

Stock days 365 / (#2 / #14)

CASHFLOW STATEMENT

CASHFLOW FROM OPERATING ACTIVITIES

Operating Profit £29,000 £27,000 £35,000

Depreciation (5,000) (4,000) (4,000)Increase in stock (15,000) (12,000) (12,000)Increase in trade debtors (28,000) (22,000) (22,000)Increase in other debtors (4,000) (4,000) (4,000)Increase in trade creditors £28,700 £29,500 £29,500Increase in other creditors £5,800 £5,400 £7,000Corporation tax charge (5,800) (5,400) (7,000)

CAPITAL & INVESTMENT ACTIVITIES

Capital expenditure (25,000) (20,000) (20,000)Increase in loans £22,000 £17,600 £17,600Share capital issued £100 £1,000 £100Dividends paid (10,000) (5,000) (5,000)

NET CASHFLOW (7,200) £8,100 £15,200

and FINALLYHave we achieved…?

Recognising Balance sheet, Profit & loss a/c Y / N / ?

Explaining how each component is created Y / N / ?

Reviewing Financial analysis and performance Y / N / ?

Have we..handed in

all paper work?

NEARLY THE ENDjust one thing!

THANK YOU

TERMS ON DRAGONS DEN AND VIDEO CLIPShttp://www.bbc.co.uk/dragonsden/business/glossary/a

Further learning ideasMY CLASSUnderstanding Company Accounts. Next 27-Jun-15

FILINGCOMPANY ACCOUNTS ON LINE http://www.companieshouse.gov.uk/webfiling/demoVideos/abbreviatedAccountsAccessible.shtml

BOOKKEEPING TERMSwww.dalesbookkeeping.co.uk_GIFs_glossary_of_bookkeeping_terms