Friday 4 September 2009
Theories & Further Information about Shareholder's Equity
The shareholder's equity is often an important part of the capital that funds the net assets.
The share capital may be made up of both ordinary and preference shares, though preference shares are much less popular these days for tax reasons. However, in the notes to the accounts there may also be a figure for Authorised Share Capital. This may be very different to the Issued Share Capital. The authorised capital is the maximum amount of money that the shareholders have decided that the company can issue in shares and will usually be considerably larger than the issues share capital as the company wants to retain the option of issuing more shares in the future to raise more capital - perhaps to fund an expansion.
The reserves will include retained profit from the past. That is profits that the firm has kept for itself and not issued to shareholders in the form of a dividend. They may also include share premiums. As mentioned in the explanation of shareholder's equity, this is where shares are issued at more than their face value. The face value of the share may be, say £1, but they may be issued at £3.50 because the market has risen in the meantime and the shares are now worth much more. The £1 will be included as part of the issued share capital (see above), but the other £2.50 will be called a share premium. A final part of reserves may be something called revaluations. If the company's assets have risen in value - perhaps because of inflation - this is effectively a source of funds for the shareholders and so also needs to be recorded on the bottom half of the balance sheet. This situation can occur particularly with property companies such as hotel operators where the value of the properties rises with a booming property market.
The shareholder's equity is shown on the balance sheet as part of the balancing figure - the one that matches the net assets. It is therefore a key part of the capital financing of the business.
The share capital may be made up of both ordinary and preference shares, though preference shares are much less popular these days for tax reasons. However, in the notes to the accounts there may also be a figure for Authorised Share Capital. This may be very different to the Issued Share Capital. The authorised capital is the maximum amount of money that the shareholders have decided that the company can issue in shares and will usually be considerably larger than the issues share capital as the company wants to retain the option of issuing more shares in the future to raise more capital - perhaps to fund an expansion.
The reserves will include retained profit from the past. That is profits that the firm has kept for itself and not issued to shareholders in the form of a dividend. They may also include share premiums. As mentioned in the explanation of shareholder's equity, this is where shares are issued at more than their face value. The face value of the share may be, say £1, but they may be issued at £3.50 because the market has risen in the meantime and the shares are now worth much more. The £1 will be included as part of the issued share capital (see above), but the other £2.50 will be called a share premium. A final part of reserves may be something called revaluations. If the company's assets have risen in value - perhaps because of inflation - this is effectively a source of funds for the shareholders and so also needs to be recorded on the bottom half of the balance sheet. This situation can occur particularly with property companies such as hotel operators where the value of the properties rises with a booming property market.
The shareholder's equity is shown on the balance sheet as part of the balancing figure - the one that matches the net assets. It is therefore a key part of the capital financing of the business.
What is Shareholder's Equity?
The shareholder's equity comes in the bottom half of the balance sheet and is part of the overall financing of the business. The shareholder's equity is a part of the overall level of capital that finances the net assets.
As well as the shareholder's equity the net assets may be financed by:
•Retained profit & reserves
•Loans & debentures
There may also be other more detailed sources of capital shown on a balance sheet. These may include the "share premium account". This is where the shares are issued at above their face value. The amount raised from the sale of shares is then split into two - the share capital (the face value of all the shares) and the share premium account (the surplus over and above the face value).
The shareholder's equity may also be known as the equity capital. The reward to the shareholders for investing this money in the business is a share of the profit - a dividend . The amount of the dividend clearly depends on the profitability of the business.
As well as the shareholder's equity the net assets may be financed by:
•Retained profit & reserves
•Loans & debentures
There may also be other more detailed sources of capital shown on a balance sheet. These may include the "share premium account". This is where the shares are issued at above their face value. The amount raised from the sale of shares is then split into two - the share capital (the face value of all the shares) and the share premium account (the surplus over and above the face value).
The shareholder's equity may also be known as the equity capital. The reward to the shareholders for investing this money in the business is a share of the profit - a dividend . The amount of the dividend clearly depends on the profitability of the business.
Theories & Further Information about Dividends Payable
When it's considering how much of its profit to pay in dividends, the company is up against various conflicting interests. The shareholders clearly want a share of the profit in return for their investment in the shares, but they also (unless they're very short-sighted!!) want the company to grow in the future. To grow in the future, the company needs to invest a proportion of the profit. Whatever is invested can't then be paid to shareholders as dividends.
It is the job of the Board of Directors to try to take account of all these conflicting interests and to decide on the level of dividend they are going to recommend is paid. This recommendation is then considered at the Annual General Meeting of the company. The Directors should be in the best position to decide what needs to be re-invested and therefore how much can be spared to be paid out as dividends.
For more detail about how much of its profit a company is paying out in dividends, shareholders or potential investors could look at the DIVIDEND COVER or the DIVIDEND YIELD RATIOS. There is more detail on these in the reported earnings per share and the reported dividend per share pages.
It is the job of the Board of Directors to try to take account of all these conflicting interests and to decide on the level of dividend they are going to recommend is paid. This recommendation is then considered at the Annual General Meeting of the company. The Directors should be in the best position to decide what needs to be re-invested and therefore how much can be spared to be paid out as dividends.
For more detail about how much of its profit a company is paying out in dividends, shareholders or potential investors could look at the DIVIDEND COVER or the DIVIDEND YIELD RATIOS. There is more detail on these in the reported earnings per share and the reported dividend per share pages.
Theories & Further Information about Dividends Payable
When it's considering how much of its profit to pay in dividends, the company is up against various conflicting interests. The shareholders clearly want a share of the profit in return for their investment in the shares, but they also (unless they're very short-sighted!!) want the company to grow in the future. To grow in the future, the company needs to invest a proportion of the profit. Whatever is invested can't then be paid to shareholders as dividends.
It is the job of the Board of Directors to try to take account of all these conflicting interests and to decide on the level of dividend they are going to recommend is paid. This recommendation is then considered at the Annual General Meeting of the company. The Directors should be in the best position to decide what needs to be re-invested and therefore how much can be spared to be paid out as dividends.
For more detail about how much of its profit a company is paying out in dividends, shareholders or potential investors could look at the DIVIDEND COVER or the DIVIDEND YIELD RATIOS. There is more detail on these in the reported earnings per share and the reported dividend per share pages.
It is the job of the Board of Directors to try to take account of all these conflicting interests and to decide on the level of dividend they are going to recommend is paid. This recommendation is then considered at the Annual General Meeting of the company. The Directors should be in the best position to decide what needs to be re-invested and therefore how much can be spared to be paid out as dividends.
For more detail about how much of its profit a company is paying out in dividends, shareholders or potential investors could look at the DIVIDEND COVER or the DIVIDEND YIELD RATIOS. There is more detail on these in the reported earnings per share and the reported dividend per share pages.
What are Dividends Payable?
Any profit that the firm makes belongs to the owners of that firm. They are the shareholders. The amount of the profit that each shareholder should receive depends on how many shares they own. The more shares they own, the larger the proportion of the company they own and therefore the more of the profit they should receive. This share of the profit is known as a dividend and to spread out fairly, the dividend is normally expressed as an amount per share.
The size of the dividend depends on two things. First it depends on the amount of profit that has been made, but secondly it depends on how much of the profit is distributed to the shareholders. Profit is a vital source of funds for investment for a company and so if they were to distribute too much to the shareholders, they would damage their long-term performance. However, at the same time the shareholders are entitled to a share as the reward for the risk they have taken in investing in the company.
The Board of Directors has to balance up these two demands on the total profit, and will then recommend the size of the dividend they think is appropriate. This will then be put to the firm's AGM for the shareholders to vote on.
Profit attributable to shareholders = Dividends paid + Retained profit
For further details about profit, you could look at the section on operating profit or the Financial Ratios section.
The size of the dividend depends on two things. First it depends on the amount of profit that has been made, but secondly it depends on how much of the profit is distributed to the shareholders. Profit is a vital source of funds for investment for a company and so if they were to distribute too much to the shareholders, they would damage their long-term performance. However, at the same time the shareholders are entitled to a share as the reward for the risk they have taken in investing in the company.
The Board of Directors has to balance up these two demands on the total profit, and will then recommend the size of the dividend they think is appropriate. This will then be put to the firm's AGM for the shareholders to vote on.
Profit attributable to shareholders = Dividends paid + Retained profit
For further details about profit, you could look at the section on operating profit or the Financial Ratios section.
What is Interest Payable?
When a firm borrows money, it has to pay interest. Interest is the return to the lender for the service of having lent money and the associated risk. The level of interest payable is therefore the total amount of interest the firm has to pay on all its borrowings, whether short-term or long-term.
The amount of interest payable will depend on how much money the firm has borrowed, and for how long it has borrowed it. The rate of interest will vary according to the level of risk (the higher the risk the higher the rate of interest) and the length of time the money is borrowed for (short-term, unpredictable borrowing such as overdrafts will command higher rates of interest).
Interest payable is usually subtracted from the operating profit to give the profit on ordinary activities before taxation. It is not considered to be a part of the trading profit, as this measures the profit the firm has made on its mainstream activity of selling its product or service.
The amount of interest payable will depend on how much money the firm has borrowed, and for how long it has borrowed it. The rate of interest will vary according to the level of risk (the higher the risk the higher the rate of interest) and the length of time the money is borrowed for (short-term, unpredictable borrowing such as overdrafts will command higher rates of interest).
Interest payable is usually subtracted from the operating profit to give the profit on ordinary activities before taxation. It is not considered to be a part of the trading profit, as this measures the profit the firm has made on its mainstream activity of selling its product or service.
What is Cost of Goods Sold?
Cost of goods sold is also sometimes phrased as COST OF SALES.
The cost of goods sold is the costs actually incurred in producing the product or service. It is the direct costs of production. It does not include the indirect costs, which may be things like administration and marketing costs. These cannot be directly attributed to producing the product and so are not included.
The cost of goods sold for a production company will include things like raw materials, energy and labour used to produce the product. For a retail company such as Marks and Spencer it will be the total amount they have paid to their suppliers for the products they sell on the shelves.
The cost of goods sold is the costs actually incurred in producing the product or service. It is the direct costs of production. It does not include the indirect costs, which may be things like administration and marketing costs. These cannot be directly attributed to producing the product and so are not included.
The cost of goods sold for a production company will include things like raw materials, energy and labour used to produce the product. For a retail company such as Marks and Spencer it will be the total amount they have paid to their suppliers for the products they sell on the shelves.
What is Operating Profit?
Profit is often a misunderstood term. Profit is the surplus in money terms that a firm has made after paying all the costs associated with producing and selling that product. It should not be muddled with sales revenue which is the money the firm has received from selling the product.
There are various types of profit that are measured by accountants in the firm's profit & loss account. Operating profit is the profit after both the direct and indirect costs have been paid.
Sales revenue - Cost of goods sold = GROSS PROFIT
Gross Profit - marketing & admin. costs = OPERATING PROFIT
Operating profit is sometimes also known as TRADING PROFIT.
There are various types of profit that are measured by accountants in the firm's profit & loss account. Operating profit is the profit after both the direct and indirect costs have been paid.
Sales revenue - Cost of goods sold = GROSS PROFIT
Gross Profit - marketing & admin. costs = OPERATING PROFIT
Operating profit is sometimes also known as TRADING PROFIT.
What is Sales Revenue?
Sales revenue is the total amount of money that the firm has earned from the sale of all its goods and services during a given time period. This is usually six months or a year. If a firm produced just one product or service the sales revenue would be the price of the product multiplied by the number of the product sold. In the case of more than one product or service the revenue from each needs to be added together.
The figure for sales revenue in the profit & loss account does not necessarily mean that the firm has received all that money because although they may have sold that quantity of the product they may still be owed some of the money as debtors. The figure for sales revenue is the figure for the total amount of their product or service, in money terms, that they have sold not the amount of money they have received.
Sales revenue is also often phrased in a profit & loss account as TURNOVER.
The figure for sales revenue in the profit & loss account does not necessarily mean that the firm has received all that money because although they may have sold that quantity of the product they may still be owed some of the money as debtors. The figure for sales revenue is the figure for the total amount of their product or service, in money terms, that they have sold not the amount of money they have received.
Sales revenue is also often phrased in a profit & loss account as TURNOVER.
What are Long-term Liabilities?
A liability is something which a firm owes to a person or another firm. It may be in the form of creditors - people or firms who have sold you goods which you have not yet paid for, or it may be money borrowed from a financial institution - loans.
As the title of the variable suggests, we are looking in this case for liabilities that are owed in the long-term. This is generally taken in accounting terms to be more than a year. This therefore tends to mean that most trade creditors (except in exceptional circumstances) are not long-term but current liabilities. Long-term liabilities thus tend to be bank loans.
They are usually shown on the top half of the balance sheet, and are subtracted from the fixed assets and the net current assets to show net assets.
As the title of the variable suggests, we are looking in this case for liabilities that are owed in the long-term. This is generally taken in accounting terms to be more than a year. This therefore tends to mean that most trade creditors (except in exceptional circumstances) are not long-term but current liabilities. Long-term liabilities thus tend to be bank loans.
They are usually shown on the top half of the balance sheet, and are subtracted from the fixed assets and the net current assets to show net assets.
Debentures, Mortgages and Long-Term Loans
As we saw from the explanation of long-term liabilities, they are liabilities that the firm has which are due in over a year. There are various possibilities for this:-
•Debentures
•Mortgages
•Long-term loans
Debentures
A debenture is a form of borrowing by a firm. It may issue debentures of a fixed value - say £1000 or £5000 - at a certain rate of interest. These debentures may be bought by individuals or by financial institutions. The debentures will have a fixed time period, after which they will be paid back. This may be 5 or 10 years or in some cases even longer. In some cases they carry perks with them. Much of the new number 1 court at Wimbledon was funded by issuing debentures in return for which people get preferential deals on tickets.
They are often attractive because they tend to be a secure investment, and because the interest will have to be paid, whatever the level of profit. This makes them less risky than ordinary shares. For the firm they can be a good way of raising money because they are predictable. It can plan ahead the cash requirement for paying the interest, and knows exactly when they will have to be redeemed.
Mortgages
A mortgage is also a form of long-term loan. However, it will usually tend to be on property or some other fixed asset. It will be what is known as a secured loan. This means that the loan is secured to the asset it was borrowed for. If the money was borrowed, for example, to finance the purchase of a plot of land and the firm fails to make the required loan payments, then the lender can start legal proceedings to repossess the asset. This means that they will then own it, and can sell it to get their money back. Any surplus would of course be returned to the firm.
The rate of interest may be fixed for a period or it may vary with market rates of interest.
Long-term loans
Other long-term loans may, unlike the mortgages, be unsecured loans. This means that the bank or financial institution that lent the money does not have any title over any of the firms assets, and they would have to go through the courts to get any money back. This can prove to be a lengthy and expensive process. An unsecured loan will therefore tend to attract a higher rate of interest then a secured one where the lender is more certain of recovering their money in the event of a problem.
All these long-term liabilities will be shown on a balance sheet and subtracted off the net current assets to give the net assets. They may alternatively be shown as a part of the firm's source of funds in the bottom half of the balance sheet. Where they are shown is simply an accounting convention and does not alter their meaning at all.
•Debentures
•Mortgages
•Long-term loans
Debentures
A debenture is a form of borrowing by a firm. It may issue debentures of a fixed value - say £1000 or £5000 - at a certain rate of interest. These debentures may be bought by individuals or by financial institutions. The debentures will have a fixed time period, after which they will be paid back. This may be 5 or 10 years or in some cases even longer. In some cases they carry perks with them. Much of the new number 1 court at Wimbledon was funded by issuing debentures in return for which people get preferential deals on tickets.
They are often attractive because they tend to be a secure investment, and because the interest will have to be paid, whatever the level of profit. This makes them less risky than ordinary shares. For the firm they can be a good way of raising money because they are predictable. It can plan ahead the cash requirement for paying the interest, and knows exactly when they will have to be redeemed.
Mortgages
A mortgage is also a form of long-term loan. However, it will usually tend to be on property or some other fixed asset. It will be what is known as a secured loan. This means that the loan is secured to the asset it was borrowed for. If the money was borrowed, for example, to finance the purchase of a plot of land and the firm fails to make the required loan payments, then the lender can start legal proceedings to repossess the asset. This means that they will then own it, and can sell it to get their money back. Any surplus would of course be returned to the firm.
The rate of interest may be fixed for a period or it may vary with market rates of interest.
Long-term loans
Other long-term loans may, unlike the mortgages, be unsecured loans. This means that the bank or financial institution that lent the money does not have any title over any of the firms assets, and they would have to go through the courts to get any money back. This can prove to be a lengthy and expensive process. An unsecured loan will therefore tend to attract a higher rate of interest then a secured one where the lender is more certain of recovering their money in the event of a problem.
All these long-term liabilities will be shown on a balance sheet and subtracted off the net current assets to give the net assets. They may alternatively be shown as a part of the firm's source of funds in the bottom half of the balance sheet. Where they are shown is simply an accounting convention and does not alter their meaning at all.
What are Net Assets?
Assets are anything which the firm owns or has title to (in other words ownership of). The term net then means all assets net of liabilities. Net assets are therefore:-
NET ASSETS = Total Assets - Total Liabilities
The total assets are made up of fixed assets (plant, machinery and equipment) and current assets which is the total of stock, debtors and cash.
The total liabilities are made up in much the same way of long-term liabilities and current liabilities.
The net assets figure therefore can be used as a measure of the value of the business. It is the value of everything the business owns after all the debts have been taken account of. For more detail of how this can be used as a measure of the value of a business try going to the theory section of the worksheet below.
NET ASSETS = Total Assets - Total Liabilities
The total assets are made up of fixed assets (plant, machinery and equipment) and current assets which is the total of stock, debtors and cash.
The total liabilities are made up in much the same way of long-term liabilities and current liabilities.
The net assets figure therefore can be used as a measure of the value of the business. It is the value of everything the business owns after all the debts have been taken account of. For more detail of how this can be used as a measure of the value of a business try going to the theory section of the worksheet below.
Theories & Further Information About Net Assets
As we have seen from the explanation of net assets, the net assets are composed of the fixed assets and the current assets less the current liabilities and the long-term liabilities. This means that they are a measure of the total worth of the business - what it should be worth if it was shut down tomorrow and all its debts paid. However, it is extremely unlikely that it would actually be worth this sum, as many assets would be worth a very different amount if you actually tried to sell them. What may be an invaluable machine to one company may be a worthless lump of scrap-metal to most others.
If this is true that they represent the total worth of the business at any moment in time, then we can use the net assets as a measure of the size of the business. However, it is far from a perfect measure of the size of the business and there are various other ways of measuring the size of the business. These may include:-
1.Number of employees
2.Sales revenue / turnover
3.Profit
However, each of these measures have their problems as a method for measuring the size or value of a business.
The net assets will be shown on a balance sheet as the balancing figure - the one that matches the shareholder's equity.
If this is true that they represent the total worth of the business at any moment in time, then we can use the net assets as a measure of the size of the business. However, it is far from a perfect measure of the size of the business and there are various other ways of measuring the size of the business. These may include:-
1.Number of employees
2.Sales revenue / turnover
3.Profit
However, each of these measures have their problems as a method for measuring the size or value of a business.
The net assets will be shown on a balance sheet as the balancing figure - the one that matches the shareholder's equity.
What are Current Liabilities?
A liability is something which a firm owes to a person or another firm. It may be in the form of creditors - people or firms who have sold you goods which you have not yet paid for, or it may be money borrowed from a financial institution - loans or overdrafts.
As the title of the variable suggests, we are looking in this case for liabilities that are owed in the short-term. This is generally taken in accounting terms to be less than a year. Any money that is owed in more than a year's time is considered to be a long-term liability. Short-term liabilities thus tend to be trade creditors and short-term borrowing such as overdrafts.
They are usually shown on the top half of the balance sheet, and are subtracted from the current assets to show net current assets.
As the title of the variable suggests, we are looking in this case for liabilities that are owed in the short-term. This is generally taken in accounting terms to be less than a year. Any money that is owed in more than a year's time is considered to be a long-term liability. Short-term liabilities thus tend to be trade creditors and short-term borrowing such as overdrafts.
They are usually shown on the top half of the balance sheet, and are subtracted from the current assets to show net current assets.
What is Cash?
Hopefully this is an obvious question as I am sure the quantity of it you have is important to you. In much the same way it is important to a business. However, in a business the term cash may have a broader meaning than it does to you as an individual. Cash is an asset to the business and is usually considered to be one of the current assets. The other current assets are stocks and debtors.
Under the heading cash on the balance sheet may be included a number of items of varying liquidity. A small amount may actually be cash (or readies) held in tills or as petty cash, but the majority is likely to be held in various bank accounts. However, since money in current accounts rarely earns interest, if a business has a surplus of cash it may invest it in various ways. Some will have to be in very liquid accounts so that if necessary they can get at it very quickly, but some may be tied up for longer periods of time.
As with the debtors, the amount of cash required will vary according to the line of business the firm is in. Retail firms may have higher levels of liquid cash than businesses who operate mostly on a credit basis and therefore rarely handle notes and coins.
Under the heading cash on the balance sheet may be included a number of items of varying liquidity. A small amount may actually be cash (or readies) held in tills or as petty cash, but the majority is likely to be held in various bank accounts. However, since money in current accounts rarely earns interest, if a business has a surplus of cash it may invest it in various ways. Some will have to be in very liquid accounts so that if necessary they can get at it very quickly, but some may be tied up for longer periods of time.
As with the debtors, the amount of cash required will vary according to the line of business the firm is in. Retail firms may have higher levels of liquid cash than businesses who operate mostly on a credit basis and therefore rarely handle notes and coins.
What are Debtors?
Debtors are people or other firms who owe money to the firm. This will usually happen where the firm has sold goods with a period of credit. The firm sells the good or service but allows the purchaser a period of credit to pay - usually a month. During this month the purchaser owes the firm the money and is therefore a debtor.
If the firm has debts these are considered an asset, because when the debtors pay the firm will have converted the debt into cash in the bank. Because most debts are relatively short-term they are considered current assets. The other current assets are stocks and cash.
The amount of debtors a firm has depends on the line of business they are in. If most of their business is with trade customers where they have to offer credit then the level of debtors may be high. For many retail businesses, however, the level of debtors will tend to be relatively low as most of their sales are cash sales.
If the firm has debts these are considered an asset, because when the debtors pay the firm will have converted the debt into cash in the bank. Because most debts are relatively short-term they are considered current assets. The other current assets are stocks and cash.
The amount of debtors a firm has depends on the line of business they are in. If most of their business is with trade customers where they have to offer credit then the level of debtors may be high. For many retail businesses, however, the level of debtors will tend to be relatively low as most of their sales are cash sales.
The Balance Sheet
The balance sheet is one of the financial statements that limited companies and PLCs produce every year for their shareholders. It is like a financial snapshot of the company's financial situation at that moment in time. It is worked out at the company's year end, giving the company's assets and liabilities at that moment.
It is given in two halves - the top half shows where the money is currently being used in the business (the net assets), and the bottom half shows where that money came from (the capital employed). The value of the two halves must be the same - Capital employed = net assets, hence the term balance sheet.
The money invested in the business may have been used to buy long-term assets or short-term assets. The long-term assets are known as fixed assets, and help the firm to produce. Examples would be machinery, equipment, computers and so on, none of which actually get used up in the production process. The short-term assets are known as current assets - assets which are used day to day by the firm. The current assets may include cash, stocks and debtors.
The top half of the balance sheet will therefore be made up of the total of the fixed and current assets, less any current or long-term liabilities the firm may have (creditors, loans and so on). It may look as follows:-
£ million
Fixed assets 200
Current assets - stock 40
- debtors 50
- cash 20
TOTAL 110
less Current liabilities (40) 70
NET ASSETS £270m
The bottom half of the balance sheet then looks at where this money came from. This depends on how the business was originally funded. The main source of money for a limited company starting up is the issue of shares. This is termed the share capital - the money the original shareholders put into the business. From then on the assets of the company may be built up by ploughing profit back into the business. This is called retained profit, and is the other source of money usually included in the bottom half of the balance sheet. This may therefore look as follows:
Share capital 100
Retained profit 170
CAPITAL EMPLOYED £270m
It is given in two halves - the top half shows where the money is currently being used in the business (the net assets), and the bottom half shows where that money came from (the capital employed). The value of the two halves must be the same - Capital employed = net assets, hence the term balance sheet.
The money invested in the business may have been used to buy long-term assets or short-term assets. The long-term assets are known as fixed assets, and help the firm to produce. Examples would be machinery, equipment, computers and so on, none of which actually get used up in the production process. The short-term assets are known as current assets - assets which are used day to day by the firm. The current assets may include cash, stocks and debtors.
The top half of the balance sheet will therefore be made up of the total of the fixed and current assets, less any current or long-term liabilities the firm may have (creditors, loans and so on). It may look as follows:-
£ million
Fixed assets 200
Current assets - stock 40
- debtors 50
- cash 20
TOTAL 110
less Current liabilities (40) 70
NET ASSETS £270m
The bottom half of the balance sheet then looks at where this money came from. This depends on how the business was originally funded. The main source of money for a limited company starting up is the issue of shares. This is termed the share capital - the money the original shareholders put into the business. From then on the assets of the company may be built up by ploughing profit back into the business. This is called retained profit, and is the other source of money usually included in the bottom half of the balance sheet. This may therefore look as follows:
Share capital 100
Retained profit 170
CAPITAL EMPLOYED £270m
What are Stocks?
Stocks are often also known as inventories. They are anything which a firm has which is not currently being used for one of the firm's functions. Most departments in the company will have stocks of something. The factory may have stocks of raw materials ready to produce, the office may have stocks of stationery and the warehouse may have stocks of finished goods.
Stocks are vital to a company to help it function smoothly. If production had to be stopped every time the firm ran out of raw materials, the time wasted would cost the firm a fortune. If a shop had no stock on the shelves, customers would soon desert them. The same is true of most areas the firm operates in - I am sure you can appreciate the importance of planning ahead and having suitable levels of stocks.
Stocks are considered to be current assets because many types of stocks can be converted into cash reasonably readily - particularly stocks of finished goods. However, they are generally the least liquid of the current assets. At times of recession or similar it may be very difficult for the firm to sell stocks, and so although they may be listed as a certain value their true value may be lower. The other current assets are debtors and cash.
Stocks are vital to a company to help it function smoothly. If production had to be stopped every time the firm ran out of raw materials, the time wasted would cost the firm a fortune. If a shop had no stock on the shelves, customers would soon desert them. The same is true of most areas the firm operates in - I am sure you can appreciate the importance of planning ahead and having suitable levels of stocks.
Stocks are considered to be current assets because many types of stocks can be converted into cash reasonably readily - particularly stocks of finished goods. However, they are generally the least liquid of the current assets. At times of recession or similar it may be very difficult for the firm to sell stocks, and so although they may be listed as a certain value their true value may be lower. The other current assets are debtors and cash.
What are Current Assets?
Assets are anything which the firm owns or has title to (in other words ownership of). Firms may have fixed assets which are long-term assets - plant, machinery and equipment, but they will also have assets which can be realised (cashed-in) in the short-term. This is generally taken in accounting terms to be less than a year.
The current assets are therefore ones that can be quickly realised and change frequently. The main current assets are stock, debtors and cash.
CURRENT ASSETS = Stock + Debtors + Cash
They are usually shown on the top half of the balance sheet, and the current liabilities are subtracted from them to show net current assets.
The current assets are therefore ones that can be quickly realised and change frequently. The main current assets are stock, debtors and cash.
CURRENT ASSETS = Stock + Debtors + Cash
They are usually shown on the top half of the balance sheet, and the current liabilities are subtracted from them to show net current assets.
Non-Profit Making Organisations
Introduction
This resource aims to give students help with financial statements from non-profit making organisations including clubs and societies. The nature of these types of organisations means that students should also be able to understand the effect of life membership schemes and donations.
The resource is relevant to:
•OCR: Module 2502, Final accounts
•AQA: Module 5, Further aspects of financial accounting
What are non-profit making organisations? Are they businesses that make losses? Are they businesses that are run badly?
Non-profit making organisations are also known as 'not for profit' organisations and this is the name we give them simply because they want to do something or provide something rather than make more and more money.
What kind of organisations are we talking about that just want to do something rather than making money? Well, is there a Youth club near you? Or a Garden Society? Or a Working Men's Club? They are probably examples of non-profit making organisations. Here's a bigger list!
•Associations
•Clubs
•Societies
•Unions
•Charities
•Universities
•Churches
This resource aims to give students help with financial statements from non-profit making organisations including clubs and societies. The nature of these types of organisations means that students should also be able to understand the effect of life membership schemes and donations.
The resource is relevant to:
•OCR: Module 2502, Final accounts
•AQA: Module 5, Further aspects of financial accounting
What are non-profit making organisations? Are they businesses that make losses? Are they businesses that are run badly?
Non-profit making organisations are also known as 'not for profit' organisations and this is the name we give them simply because they want to do something or provide something rather than make more and more money.
What kind of organisations are we talking about that just want to do something rather than making money? Well, is there a Youth club near you? Or a Garden Society? Or a Working Men's Club? They are probably examples of non-profit making organisations. Here's a bigger list!
•Associations
•Clubs
•Societies
•Unions
•Charities
•Universities
•Churches
Sources of Finance
Introduction
This resource is designed for use with Accounting courses at A' level. This resource is relevant to the following:
•AQA Module 5, Section 14.5: 'Types of Business Organisation, Sources of Finance'
•OCR Module 2505, Sections 5.3.2 and 5.6.2
For many businesses, the issue about where to get funds from for starting up, development and expansion can be crucial for the success of the business. It is important, therefore, that you understand the various sources of finance open to a business and are able to assess how appropriate these sources are in relation to the needs of the business. The latter point regarding 'assessment' is particularly important at A2 level where you are expected to make judgements.
Internal Sources
Traditionally, the major sources of finance for a limited company were internal sources:
•Personal savings
•Retained profit
•Working capital
•Sale of assets
External Sources
Ownership Capital
In this context, 'owners' refers to those people/institutions who are shareholders. Sole traders and partnerships do not have shareholders - the individual or the partners are the owners of the business but do not hold shares. Shares are units of investment in a limited company, whether it be a public or private limited company. Shares are generally broken down into two categories:
•Ordinary shares
•Preference shares
Non-Ownership Capital
Whilst the following sources of finance are important, they are not classed as Ownership Capital - Debenture holders are not shareholders, nor are banks who lend money or creditors. Only shareholders are owners of the company.
•Debentures
•Other loans
•Overdraft facilities
•Hire purchase
•Lines of credit from creditors
•Financial structures of four well known British companies
•Grants
•Venture capital
•Factoring and invoice discounting:
◦Factoring
◦Invoice discounting
•Leasing
Accounting for Changes in Capital Structure
This section explores issues such as the authorised, issued and called-up share capital together with some of the ways in which an organisation might change their proportions. It reviews such aspects of capital as the bookkeeping entries to deal with the application and allotment of share issues. It also discusses the effects on the balance sheet of changes in capital structure. The section includes interactive and printable worksheets to enable students to practise bookkeeping for share issues.
•Authorised, issued and called up share capital
•Bookkeeping for share issues. Shares can be issued in a number of ways, the most important aspect from our point of view being how and when shareholders pay for the shares they buy:
◦Shares can be issued and paid for in full on application, either
■at par, or
■at a premium.
◦Share issues might be under or over subscribed.
◦Shares are not all issued for cash. Some issues, for example, bonus issues arise as a result of a capital restructuring of the company, sometimes called a rights issue.
◦Shares can be issued and paid for by instalments.
•Numerical questions relating to the issue of shares. Each of these can be completed either by filling in an interactive form or on paper using a printable worksheet.
◦Allotment of shares
◦Overnight Bamboo plc - accounting entries to record the issue of shares
◦Helford Global plc - accounting entries to record the issue of shares
This resource is designed for use with Accounting courses at A' level. This resource is relevant to the following:
•AQA Module 5, Section 14.5: 'Types of Business Organisation, Sources of Finance'
•OCR Module 2505, Sections 5.3.2 and 5.6.2
For many businesses, the issue about where to get funds from for starting up, development and expansion can be crucial for the success of the business. It is important, therefore, that you understand the various sources of finance open to a business and are able to assess how appropriate these sources are in relation to the needs of the business. The latter point regarding 'assessment' is particularly important at A2 level where you are expected to make judgements.
Internal Sources
Traditionally, the major sources of finance for a limited company were internal sources:
•Personal savings
•Retained profit
•Working capital
•Sale of assets
External Sources
Ownership Capital
In this context, 'owners' refers to those people/institutions who are shareholders. Sole traders and partnerships do not have shareholders - the individual or the partners are the owners of the business but do not hold shares. Shares are units of investment in a limited company, whether it be a public or private limited company. Shares are generally broken down into two categories:
•Ordinary shares
•Preference shares
Non-Ownership Capital
Whilst the following sources of finance are important, they are not classed as Ownership Capital - Debenture holders are not shareholders, nor are banks who lend money or creditors. Only shareholders are owners of the company.
•Debentures
•Other loans
•Overdraft facilities
•Hire purchase
•Lines of credit from creditors
•Financial structures of four well known British companies
•Grants
•Venture capital
•Factoring and invoice discounting:
◦Factoring
◦Invoice discounting
•Leasing
Accounting for Changes in Capital Structure
This section explores issues such as the authorised, issued and called-up share capital together with some of the ways in which an organisation might change their proportions. It reviews such aspects of capital as the bookkeeping entries to deal with the application and allotment of share issues. It also discusses the effects on the balance sheet of changes in capital structure. The section includes interactive and printable worksheets to enable students to practise bookkeeping for share issues.
•Authorised, issued and called up share capital
•Bookkeeping for share issues. Shares can be issued in a number of ways, the most important aspect from our point of view being how and when shareholders pay for the shares they buy:
◦Shares can be issued and paid for in full on application, either
■at par, or
■at a premium.
◦Share issues might be under or over subscribed.
◦Shares are not all issued for cash. Some issues, for example, bonus issues arise as a result of a capital restructuring of the company, sometimes called a rights issue.
◦Shares can be issued and paid for by instalments.
•Numerical questions relating to the issue of shares. Each of these can be completed either by filling in an interactive form or on paper using a printable worksheet.
◦Allotment of shares
◦Overnight Bamboo plc - accounting entries to record the issue of shares
◦Helford Global plc - accounting entries to record the issue of shares
Accountancy
Accountancy or accounting is the art of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management.
Such financial information is primarily used by managers, lenders, investors, tax authorities, regulators, and other decision makers to make resource allocation decisions between and within companies, organizations, and public agencies. It involves the process of recording, verifying, and reporting of the value of assets, liabilities, income, and expenses in the books of account (ledger) to which debit and credit entries (recognizing transactions) are chronologically posted to record changes in value (see bookkeeping). Accounting has also been defined by the AICPA as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.
Etymology
The English term accountant is derived from accomptant, which was pronounced by dropping the 'p' and over time further changed in pronunciation and spelling. Accomptant was derived from the French compter, itself originating from the Latin computare. From the word accountant the term accountancy is derived
History
Early history
Accountancy's infancy dates back to the earliest days of human agriculture and civilization (the Sumerians in Mesopotamia, and the Egyptian Old Kingdom). Ancient economic thought of the Near East facilitated the creation of accurate records of the quantities and relative values of agricultural products, methods that were formalized in trading and monetary systems by 2000 B.C. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents. The Islamic Quran also mentions simple accounting for trade and credit arrangements
In the twelfth-century A.D., the Arab writer, Ibn Taymiyyah, mentioned in his book Hisba (literally, "verification" or "calculation") detailed accounting systems used by Muslims as early as in the mid-seventh century A.D. These accounting practices were influenced by the Roman and the Persian civilizations that Muslims interacted with. The most detailed example Ibn Taymiyyah provides of a complex governmental accounting system is the Divan of Umar, the second Caliph of Islam, in which all revenues and disbursements were recorded. The Divan of Umar has been described in detail by various Islamic historians and was used by Muslim rulers in the Middle East with modifications and enhancements until the fall of the Ottoman Empire.
The development of mathematics and accounting were intertwined during the Renaissance. Mathematics was in the midst of a period of significant development in the late-15th century. Hindu-Arabic numerals and algebra were introduced to Europe from Arab mathematics at the end of the 10th century by the Benedictine monk Gerbert of Aurillac, but it was only after Leonardo Pisano (also known as Fibonacci) put commercial arithmetic, Hindu-Arabic numerals, and the rules of algebra together in his Liber Abaci in 1202 that Hindu-Arabic numerals
Such financial information is primarily used by managers, lenders, investors, tax authorities, regulators, and other decision makers to make resource allocation decisions between and within companies, organizations, and public agencies. It involves the process of recording, verifying, and reporting of the value of assets, liabilities, income, and expenses in the books of account (ledger) to which debit and credit entries (recognizing transactions) are chronologically posted to record changes in value (see bookkeeping). Accounting has also been defined by the AICPA as "The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.
Etymology
The English term accountant is derived from accomptant, which was pronounced by dropping the 'p' and over time further changed in pronunciation and spelling. Accomptant was derived from the French compter, itself originating from the Latin computare. From the word accountant the term accountancy is derived
History
Early history
Accountancy's infancy dates back to the earliest days of human agriculture and civilization (the Sumerians in Mesopotamia, and the Egyptian Old Kingdom). Ancient economic thought of the Near East facilitated the creation of accurate records of the quantities and relative values of agricultural products, methods that were formalized in trading and monetary systems by 2000 B.C. Simple accounting is mentioned in the Christian Bible (New Testament) in the Book of Matthew, in the Parable of the Talents. The Islamic Quran also mentions simple accounting for trade and credit arrangements
In the twelfth-century A.D., the Arab writer, Ibn Taymiyyah, mentioned in his book Hisba (literally, "verification" or "calculation") detailed accounting systems used by Muslims as early as in the mid-seventh century A.D. These accounting practices were influenced by the Roman and the Persian civilizations that Muslims interacted with. The most detailed example Ibn Taymiyyah provides of a complex governmental accounting system is the Divan of Umar, the second Caliph of Islam, in which all revenues and disbursements were recorded. The Divan of Umar has been described in detail by various Islamic historians and was used by Muslim rulers in the Middle East with modifications and enhancements until the fall of the Ottoman Empire.
The development of mathematics and accounting were intertwined during the Renaissance. Mathematics was in the midst of a period of significant development in the late-15th century. Hindu-Arabic numerals and algebra were introduced to Europe from Arab mathematics at the end of the 10th century by the Benedictine monk Gerbert of Aurillac, but it was only after Leonardo Pisano (also known as Fibonacci) put commercial arithmetic, Hindu-Arabic numerals, and the rules of algebra together in his Liber Abaci in 1202 that Hindu-Arabic numerals
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