Write a Report about Journal Entry

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Application to Workplace

Personal Development

 

SKU: Repo202841 (1)

Journal Entry

Write a short Journal Entry to explain:

  • The key things you learned during the last two weeks
  • How can they relate to the workplace?
  • How they can aid your personal and professional development?
  • Remember to be specific and give examples.

Your Journal Entry should be submitted to the Journal Tool below. Your tutor will then provide brief feedback on your submission.

At the end of this module you will be required to submit a final fuller reflection, based on all the work you have done in the whole module. This final Journal Report carries 20% of the marks for the module as a whole. Paying full attention to your preliminary journal entries will be of help when you come to do the final Journal Report.

Topics in Unit 1 & 2

Unit 1: Introduction to Accounting and Finance

Welcome to your studies of Business Finance. The purpose of this module is to help you gain an understanding of accounting and then to apply that understanding to both simulated and real situations.

We assume that you have no prior knowledge of accounting or finance, only that you have a reasonable grasp of how organizations work, from your earlier studies and perhaps also from work experience.

In this unit we shall:

  • Consider the differences between financial accounting and management accounting
  • Identify the main users of financial information
  • Establish the financial objectives of a business
  • Introduce the key components of the regulatory framework of accounting

 On completion of this unit you will be able to:

  • Outline the nature and purposes of accounting
  • Identify the main users of financial information
  • Distinguish financial accounting from management accounting
  • Explain the regulatory framework of accounting

Unit 2: Measuring and Reporting Financial Position

This unit is concerned with two separate but connected topics.

The first is the statement of financial position. You’ll remember from the previous unit that this is one of the three main financial statements. Specifically, the statement of financial position is a summary of what’s left at the end of the period, covering assets, liabilities and equity. It therefore provides the user with a summary of the position of the organization at a point in time.

The second topic is the elements of accounting. The elements are the basic building blocks of accounting and there are just five of them, namely:

  • Income, money coming in from trading Expenses, money going out from trading
  • Assets, things we own
  • Liabilities, things we owe
  • Equity, the difference between assets and liabilities and hence what we’ve got left over, ie what we’re worth

More formally, we can express equity as “Assets – Liabilities = Equity” and this is the basis of the statement of financial position. Note that equity is also referred to as ‘capital’.

In this unit we shall:

  • Examine the presentation and content of the statement of financial position
  • Consider the role of accounting conventions
  • Explore methods of valuing assets

On completion of this unit you will be able to:

  • Explain what the statement of financial position is and what it tells the user
  • List and explain the elements of accounting

Unit 3: Measuring and Reporting Financial Performance

We’ve already introduced the statement of financial position in the previous unit, so this unit explores in detail the preparation and use of the financial statements that a typical organization will produce to tell third parties about its performance. These are the income statement and statement of cash flows.

The next unit introduces the idea of matching revenues and expenses more explicitly. This is applied to inventory (stock), depreciation and provisions. Taking this unit and the next together, you’ll then have a good understanding of all the basic ideas and techniques of financial accounting.

You’ll remember from the previous unit that the two financial statements which report performance during the previous year are:

  • Income statement; this is a summary of revenue and expenses, and subtracting one from the other gives the profit for the year, this used to be called the ‘profit and loss account’ but the more commonly accepted name is now ‘income statement’
  • Statement of cash flows; this is what it says – a summary of cash in and out over the past year. In a simple case, you could think of this as a summary of money in and out of the organization’s bank account

 In this unit we shall:

  • Introduce the income statement
  • Discuss the role and preparation of the statement of cash flows

On completion of this unit you will be able to:

  • Outline the nature and purposes of the income statement and statement of cash flows
  • Explain how the income statement and statement of cash flows are prepared

Unit 4: Application of Accruals

You’ll remember that one of the fundamental ideas of accounting is the accruals concept.

To recap, this says that we should account for income or an expense in the period to which it relates, rather than the period in which the associated cash flow occurs. For example, we record a sale in the period in which we agree the contract and deliver the goods or service, even though we haven’t received the money for it. Assuming wereceive the cash next year then the cash flow will be reported next year, but the sale will already have been recorded in the income statement in the current year. In the meantime, we’re owed the money, so we’ll show a receivable (debtor) in this year’s statement of financial position.

Inventory:

This is what is more commonly called ‘stock’; note however, that under international accounting terminology it is called ‘inventory’. This represents goods that we’ve bought this year but not yet sold, so they’re still sitting in our warehouse at the end of the year. The significance of this for accounting is that we need to make an adjustment for items we’ve bought but not sold when we prepare an income statement.

To illustrate, suppose we buy 100 items for £10 each and sell 90 of them in the current year for £15 each. In line with what we said above about following the accruals concept, there’s no argument that the sales for the year were £1,350 (90 x 15), but, in line with the accruals concept, we need to set against this only the cost of the 90 we’ve sold, not the 100 we bought in the year. Our ‘cost of sales’, or ‘cost of goods sold’, is 90 x £10, ie £900 and it’s this which is set against the £1,350 to calculate the profit of £450. We can arrive at this correct figure of 90 items by starting with the 100 we bought and then subtracting the stock of 10, and deducting the cost of the 10 items from the cost of the 100 .

Depreciation:

One of the other major applications of the accruals concept is in accounting for non-current assets, that is, those assets which have a life of more than one year. The issue is that the assets are gradually used up over a number of years so it seems reasonable that we should spread the cost of them across that number of years, rather than allocating the whole cost to the year in which we bought the assets. Depreciation is simply the way we achieve this spreading of cost.

Bad and doubtful debts:

One final application of the accruals concept is in accounting for not being paid by our debtors, that is, customers who’ve taken our goods or services but look like not paying. The key thing to remember in accounting for such debts is that there are two separate situations, namely:

We know for sure that we won’t be paid; in this case we write off the debt by reducing the asset “receivables” in the statement of financial position and showing this loss as an expense in the income statement, called something like ‘bad debts written off’.

We’re not sure whether we’ll be paid or not; in this case we don’t want to write off the debt because it might yet be good, so we create a separate ‘provision for doubtful debts’ (which is shown separately on the statement of financial position) and match this with an expense in the income statement called in this case ‘doubtful debts’.

In this unit we shall:

  • Learn how to adjust for inventory held at the end of the period and the principles for valuing this
  • Examine the principle of depreciation and different methods for calculating it
  • Consider the need to write off any bad debts or make a provision for any debts which are considered doubtful

On completion of this unit you will be able to:

  • Explain the principles of accruals accounting and contrast it with cash accounting
  • Prepare financial statements including adjustments for inventory, depreciation and bad debts

Unit 5: Limited Companies and Sources of Finance

This unit is concerned with two topics, namely the special features of limited company accounts and with sources of finance.

Limited company accounts:

The financial statements of limited companies are largely the same as those for any other organisation, so this module has so far made only passing reference to forms of business organisation. At its simplest a business will be owned and run by a single person – a ‘sole trader’. All the profit of the business belongs to the owner and is added to the owner’s existing equity. The consequent equity at the end of the period then appears in the statement of financial position.

A slightly more complex business set up is the partnership, where there are two or more owners. Accounting for partnerships isn’t part of this module, but all it essentially amounts to is splitting the profit at the end of the income statement, and then showing two or more capital accounts in the statement of financial position to report each partner’s share of the business. Limited companies are a very common business form, of course, so accounting for them is covered by this module. Because there are so many owners who hold a share of the company – hence ‘shareholders’ – we lump together all their equity stakes as a single figure, called ‘share capital’ in the statement of financial position. The profit for the year isn’t added to the share capital but put in a separate account, called a reserve, which then forms part of what the business owes to the shareholders, along with the share capital.

All of this is explained in greater detail in the textbook.

Sources of finance:

Because companies, aiming to be bigger, tend to require more money than sole traders or partnerships, their sources of finance are usually more than just the private funds of the shareholders. In particular, loans often form a large part of the company’s finances, and lenders also have a stake in the company. Furthermore, given the large size of many companies, and the possibility of conflicts between shareholders and between them and lenders, as well as the other users we saw in Unit 1, there are many rules about both the general running of a company and about the accounting and reporting requirements.

… again, this is covered in more detail in the textbook.

In this unit we shall:

  • Examine the main features of limited companies
  • Consider in detail the sources of finance available to companies

On completion of this unit you will be able to:

  • Explain the main features of a limited company and contrast it with a sole trader and a partnership
  • Describe the particular features of limited company accounting, including share capital and reserves
  • Discuss the main sources of company finance

Unit 6: Analysis and Interpreting of Financial Statements

This unit is about making sense of the financial information we’ve been putting together over the past few units. In other words, it’s less about preparing financial information and more about using it to help us make decisions. You’ll remember from Unit 1 that the primary purpose of accounting is held to be helping users to make decisions. That means that we need to be able to draw information from a set of financial statements and then use that information as evidence to guide our decisions. There’s a range of techniques we can use to help us do this, but the key technique we’ll use is ratio analysis.

Ratio analysis starts by calculating a series of ratios from the information in the financial statements. These ratios can, in principle, be the relationship between any two, or more, figures. For example, we could divide inventory by share capital but what that ratio would tell us isn’t obvious. Accordingly, there’s a fairly well-established set of ratios which have been tried and tested and found to be useful, and these are covered in Chapter 6 of the textbook. Once we’ve calculated a useful set of ratios we need to interpret them. This means identifying trends, perhaps, for example, that a ratio measuring profitability has risen since last year, but is still below average for the industry. The clever step is then to try to determine the causes of that movement, because this will then indicate what’s been happening in the company.

On completion of this unit you will be able to:

  • Calculate a range of accounting ratios
  • Explain the meaning of each ratio
  • Draw conclusions about the financial health of the organization
  • Outline the major shortcomings of ratio analysis

Unit 7: Introduction to Management Accounting

This unit marks a major shift in this module, from financial accounting to management accounting.

You’ll remember from Unit 1 that financial accounting is concerned with reporting to those outside the company. The income statement, statement of financial position and statement of cash flows  are all aimed primarily at external users, such as shareholders, lenders, suppliers etc. By contrast, management accounting is distinguished by being concerned with reporting to those within the organization – primarily, as the name suggests, the management. This means it is less concerned with reporting what has happened than with providing information to aid the day to day running of the organization.

Consequently, the management accountant’s job focuses on calculating the cost of providing a particular product or service, with preparing budgets to help the organization plan its activities for the future, and with assessing whether a particular investment is a good idea. There are many facets to this but in this unit we’ll start by looking two topics, namely cost behavior and break-even analysis.

This unit also looks at cost-based decision making and absorption costing, sometimes known as full cost accounting.

Cost behaviour

The first part of looking at costs is to explore how costs behave. This might seem an odd aspect to start with, but there’s a key division of costs into two types, fixed and variable, that is fundamental to working out the cost of any product or service. Briefly, a fixed cost is one which doesn’t vary with the level of activity in a business, for example how many tables a furniture maker produces, whereas a variable cost is one which does so very. An example of a fixed cost might then be, say, rent, since the firm will pay this however busy it is, while an example of a variable cost could be wood, since the firm will use more of this the more tables it makes.

Break even analysis

One of the reasons for distinguishing between fixed and variable costs is that it helps us tackle the question of how busy we have to be for our organization to break even, that is to make a profit of zero, but cover all our costs. This obviously a key thing to plan for since not making a loss is a pre-requisite for any organization to be a going concern.

Cost-based decision-making

This uses the ideas of variable cost, contribution etc in an approach to decision making called marginal analysis. This addresses the question of how managers should act at the margin. Typical questions would include, for example, is it worth accepting an additional one-off contract? If so, how much should we charge? Would we be better buying in an extra product rather than making it ourselves?

Full cost accounting

This unit then goes on to explore alternative approaches to costing, specifically the full cost approach and a more recent development known as activity-based costing. As we’ll see, one of the key issues in costing is how to deal with overheads, ie the costs that aren’t easily attributable to a particular product or service. Nevertheless, it’s obviously important that we include such overheads in any analysis.

Finally, this unit then introduces an alternative approach to allocating overheads, this time based on trying to identify what activities cause the costs to be incurred, ie activity based costing.

In this unit we shall:

  • Examine cost behavior
  • Consider the relevance of this in calculating the contribution and break-even point
  • Consider additional uses of the contribution in decision-making
  • Examine alternative approaches to costing

On completion of this unit you will be able to:

  • Explain the difference between fixed and variable costs
  • Explain the nature of accounting contribution
  • Calculate the break-even point
  • Apply marginal analysis for a range of decision-making
  • Calculate and explain full costs
  • Outline the main features of activity based costing

Unit 8: Budgeting

This unit covers budgeting and the associated topic of variance analysis. This is a large topic but this module  only requires a broad understanding of the general approach, benefits etc.

Budgeting

Budgeting is part of the decision-making process of an organization, and some would argue that it is central to that process. A budget is simply a plan of what the organization is going to do, expressed in some common unit of measurement. For example, this could be a sales budget which specifies that we plan to sell 2,000 tables next year, and we could also have a staff budget which says that we plan to employ 20 people to do this, as well as budgets of raw materials to be used etc. Each of these budgets will be useful in its own right but we obviously need to link them, since how many we can sell depends partly on how many we can make and this depends on how many people we’ll employ and the amount of raw materials we’ll use.

Consequently, we need to express each of these budgets in a common denominator and the obvious one is currency, eg £s. This process of preparing and then linking the various budgets to help us plan our activities, is the first benefit of budgeting. Not only does it force individual managers to formally plan, but it also forces them to coordinate their plans with other managers.

Variance analysis

Once the budget has been agreed, it forms the statement of what’s supposed to happen. As time goes by, we can then compare actual experience (people employed, materials used etc) against the budget, and look for variances between the two. Where variances are small we can say that things are going according to plan and managers can shift their attention elsewhere, to areas where variances are large. Managers will, of course, be particularly concerned where variances are adverse, that is, where actual performance is worse than budgeted. However, even where variances are favorable, managers should investigate the causes of the differences because itis unexpected and  hence may indicate a problem.

This process of identifying and investigating the causes of variances with a view to fixing any problems, is called variance analysis. Overall, bear in mind that this module does not require you to carry out in-depth variance analysis. The focus is that you should be able to explain how budgets and the consequent variances can be used, in principle, to help managers to manage.

In this unit we shall:

  • Define a budget and explain the budgeting process
  • Discuss the construction and use of various budgets
  • Consider the role of variance analysis

On completion of this unit you will be able to:

  • Outline and explain the budgeting process
  • Prepare a simple budget
  • Calculate and explain simple budget variances

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