Business accounting - Lampeter Builder's Merchants - Essay Example

? Number       Module       Assignment Business Accounting – LAMPETER BUILDER’S MERCHANTS’ Word Count - 3,125 words Table of Contents(1)Balance Sheet 4 (2) Profit and Loss Statement 5 (3) Value Added Taxation 6 Research 6 Planning and ordering 6 Presentation 6 Graphical / Tabular Representation 8 (4) Comparison between Reducing balance method and Straight line method of depreciation 9 Research 9 Planning and Ordering 9 Presentation 10 Graphical / Tabular Representation (1) 10 Graphical / Tabular Representation (2) 11 Graphical / Tabular Representation (3) 12 (5) Implications of the decision of buying new vehicles 12 Research 12 Planning and Ordering 12 Presentation 13 Graphical / Tabular Representation (1) 14 (6) Organization of business accounting procedure 15 Research 15 Planning and Ordering 15 Presentation 16 Graphical / Tabular Representation (1) 17 Bibliography 18 S[1] “VAT rates, thresholds, fuel scale charges, exchange rates” http://www.hmrc.gov.uk. HM Revenue and Customs, n.d. Web. 28 July. 2011. 18 [2] “Building and Construction Work and VAT” http://www.hmrc.gov.uk. HM Revenue and Customs, n.d. Web. 28 July. 2011. 18 [3] “VAT Returns: how to complete your VAT Return box-by-box” http://www.hmrc.gov.uk. HM Revenue and Customs, n.d. Web. 29 July. 2011. 19 [4] “VAT Returns: how to complete your VAT Return box-by-box” http://www.hmrc.gov.uk. HM Revenue and Customs, n.d. Web. 29 July. 2011. 19 [5] “Depreciation – Reducing Balance Method” http://www.bizhelp24.com. Biz help 24, n.d. Web. 29 July. 2011. 19 [6] “IAS 36 – Impairment of assets” http://www.iasplus.com. IAS Plus – summaries of International Financial Reporting Standards. Web. 30 July. 2011. 19 [7] Jean Murray. “Steps to a Business Record Keeping System that Works” http://biztaxlaw.about.com. About.com US Business Law/Taxes Web. 30 July. 2011. 19 (1) Balance Sheet LAMPETERS BUILDERS MANAGEMENT PFOFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED MARCH 31, 2011 Amount in ? Sales 1,110,000 Cost of Goods sold Opening Stock 460,000 Purchases 360,000 Closing Stock (478,000) Depreciation 20,000 362,000 Gross profit 748,000 Administrative Expenses Rent and rates 52,000 Salaries and wages 76,000 Telephone 4,000 Advertising 12,000 Vehicle running expenses 44,000 Electricity 3,000 Insurance 15,000 Stationery 2,000 208,000 Net profit 540,000 (2) Profit and Loss Statement LAMPETERS BUILDERS MANAGEMENT BALANCE SHEET AS AT MARCH 31, 2011 Amount in ? Non-Current Assets Fixed Assets (Cost) 200,000 Accumulated Depreciation (100,000) Fixed Assets (WDV) 100,000 Current Assets Trade debtors 18,000 Bank (9,000) Closing Stock 478,000 Total Assets 587,000 Current Liabilities Trade creditors 43,000 Capital 28,000 Drawings (24,000) Profit for the year 540,000 Total Equity and Capital 587,000 (3) Value Added Taxation Research The prime resource for research was the website ‘HM Revenue and Customs’ Planning and ordering What are the prevailing VAT rates in UK What rates are applicable on the business that the company is currently engaged in What are the methods and procedure of filing the VAT returns How the VAT is calculated What are the deadlines for submission of the return Presentation VAT is applicable on different rate depending on the type of Goods and services offered by the company. In addition, there are some goods and services that are exempted from VAT. The VAT rates are divided into three segments Standard Rate 20 per cent Reduced Rate 5 per cent Zero Rate 0 per cent [1] Since the Company, Lampeter Builders’ Merchants is involved in the construction and material business, the following rates are applicable on the company Type of work VAT rate Construction of a new house or flat zero Converting a building into a house or flat reduced rate Renovating or altering an empty house or flat reduced rate Supplying and installing certain mobility aids for elderly people reduced rate Supplying and installing certain energy saving materials and equipment reduced rate Supplying and installing certain heating systems and security goods when funded by a grant reduced rate Connecting or reconnecting to the mains gas supply - first time connections and grant-funded connections or reconnections Can sometimes be zero or reduced rate Supplying or installing goods for a disabled person in their home zero Making alterations to suit a disabled person zero Converting a residential building into a different residential use - for example combining two cottages into a single house reduced rate [2] At the end of every three months, the company already registered for VAT needs, to file a quarterly VAT return. The return can be filed either electronically or through paper returns. The returns, after properly completing are then sent to the following address HM Revenue & Customs VAT Controller VAT Central Unit BX5 5AT [3] The total amount of VAT payable by the company is calculated based on the following step by step method Graphical / Tabular Representation Box Particulars Description 1 VAT Due On Sales And Other Outputs Total amount of sales 2 VAT Due From You (But Not Paid) On Acquisitions From Other EU Countries You need to work out the VAT due - but not yet paid by you - on goods that you buy from other EU countries, and any services directly related to those goods (such as delivery charges) 3 Total VAT Due This is the total of box 1 and box 2 added together. It is the amount of VAT that is due to HMRC. 4 VAT Reclaimable On Your Purchases This is the VAT you have been charged on your purchases for use in your business 5 VAT Payable Or Reclaimable Take the figures from box 3 and box 4. Deduct the smaller figure from the larger one and put the difference in box 5 6 Your Total Sales Excluding VAT Enter the total figure for your sales (excluding VAT) for the period, that is, the sales on which you charged the VAT you put in box 1 7 Your Total Purchases Excluding VAT Enter the total figure for your purchases (excluding VAT) for the period, 8 The Total Value Of Goods You Supplied To Other Eu Countries Put in the total value of goods you supplied to another EU country and services related to those goods (such as delivery charges). 9 The Total Value Of Goods You Acquired From Other EU Countries Enter the total value of goods you received from VAT registered suppliers in another EU country and services related to those goods (such as delivery charges) [4] According to the stipulated guidelines for the filing of return, the deadline for the company for the submission of the return is as follows Accounting period ending Due date for paper VAT Return* Due date for return submitted online Due date for paper VAT Return, paid electronically 31-Mar-11 28-Apr-11 7-May-11 7-May-11 The due date for the payment is shown in the following table Accounting period ending Due date for payment by cheque in the post* **  Due date for payment by an electronic method (other than online VAT Direct Debit) * Due date for payment by online VAT Direct Debit 31-Mar-11 28-Apr-11 6-May-11 11-May-11 (4) Comparison between Reducing balance method and Straight line method of depreciation Research The following were the primary sources for the research International Accounting Standard 16 ‘Property, Plant and Equipment’ Depreciation – Reducing Balance Method - http://www.bizhelp24.com Planning and Ordering Why does a tangible asset depreciate What is the formula for calculating straight line depreciation What is the current depreciation schedule of the company What is reducing balance method of depreciation What is the formula for calculating reducing balance method of depreciation What would be the revise depreciation schedule of the company under reducing balance method of depreciation What effect would it have on the profit of the company Presentation Depreciation of any non-current assets can be due to the normal wear and tear over the course of its life or due to the technical obsolesce, Lampeter builder’s Merchants currently has adopted the straight line method of depreciation which is calculated according to the following formula Annual Depreciation Expense = Cost of the asset - Salvage Value of the Asset Useful life of the asset The same annual depreciation expense is charged to the profit and loss account annually. The following is the current depreciation schedule of the fixed asset (over its useful life) as represented in the balance sheet of the company Graphical / Tabular Representation (1) Depreciation Schedule based on straight line method Year Historical Cost Depreciation Expense for the year Accumulated Depreciation Closing Written Down Value in Balance Sheet 1 200,000 20,000 20,000 180,000 2 200,000 20,000 40,000 160,000 3 200,000 20,000 60,000 140,000 4 200,000 20,000 80,000 120,000 5 200,000 20,000 100,000 100,000 6 200,000 20,000 120,000 80,000 7 200,000 20,000 140,000 60,000 8 200,000 20,000 160,000 40,000 9 200,000 20,000 180,000 20,000 10 200,000 20,000 200,000 - Whereas according to the reducing balance, the annual depreciation expense is calculated according to the following formula Annual Depreciation Expense = Written Down Value of the asset x Depreciation rate [5] Written down value for the first year the asset is purchased is the cost of the asset and for every subsequent year, it is the Cost less accumulated depreciation expense. Depreciation rate is determined based on the best judgment depending upon the useful life of the asset. If Lampeter builder’s Merchants would have adopted the reducing balance method of depreciation, the following would be the revised depreciation schedule of the company Graphical / Tabular Representation (2) Depreciation Schedule based on reducing balance method Year Opening Written Down Value Accumulated Depreciation Depreciation Expense for the year Closing Written Down Value in Balance Sheet 1 200,000 0 20,000 180,000 2 180,000 20,000 18,000 162,000 3 162,000 38,000 16,200 145,800 4 145,800 54,200 14,580 131,220 5 131,220 68,780 13,122 118,098 6 118,098 81,902 11,810 106,288 7 106,288 93,712 10,629 95,659 8 95,659 104,341 9,566 86,093 9 86,093 113,907 8,609 77,484 10 77,484 122,516 7,748 69,736 As evident from the balance sheet trial balance of the company, it has been four years since the company purchased the fixed assets as the amount of accumulated depreciation expense is ? 80,000. The following table represents the impact on the profitability of the company if it had adopted the reducing balance method of depreciation Graphical / Tabular Representation (3) Year Depreciation expense under straight line method Depreciation expense under reducing balance method Increase in profitability 1 20,000 20,000 - 2 20,000 18,000 2,000 3 20,000 16,200 3,800 4 20,000 14,580 5,420 Total 80,000 68,780 11,220 The above comparison shows that, in totality, the profit of the company would have increased by ? 11,220. (5) Implications of the decision of buying new vehicles Research The following were use as the primary sources for the research International Accounting Standard 16 ‘Property, Plant and Equipment’ International Accounting Standard 36 ‘Impairment of Assets’ General understanding of the profit and loss statement of a manufacturing concern and how increase in fixed assets increase the general fuel and maintenance cost Planning and Ordering Is it a capital or revenue expenditure What impact does the buying decision has on the income statement of the company What are the likely impacts on the selling price of the product or services the company provides How the depreciation expenses would be affected What effect would the increased depreciation expense have on the projected profits of the company How this effect can be graphically represented Presentation The decision of the company to purchase new vehicles amounting to ? 200,000 can have several impacts on the sales and profitability of the company. The decision of purchasing the new vehicles will have the following effects on the profitability of the company Increase in fuel cost of the company Increase in maintenance cost Loss on account of impairment Increase in annual depreciation expense The purchase of new vehicles is likely to increase the monthly fuel cost of the company. This would not be a one off capital expenditure and it has been generally observed that the fuel prices usually represents inclining trend, this expenditure is expected to increase further more with the passage of time. One solution would be to purchase large quantity of fuel at once, but that would require additional capital expenditure at the moment. The purchase of new machinery is also likely to increase the monthly vehicles maintenance cost of the company. In addition, if subsequently the realizable value of the vehicles decreases below the fair value less cost of selling or the future expected cash flows from the use of vehicles, impairment loss will be recognized as the assets are recorded in the balance sheet at the lower of cost or their realizable value. [6] Another impact on the profitability of the company would be the increase in the annual depreciation expense for the year. If it is assume that the company depreciates the acquired vehicles over a period of 10 years, on straight line basis, and the profitability of the company increase by 10% every year (as compared to the previous financial year) due to the implementation of the new strategy, the following table represents the profitability pattern over the coming years Graphical / Tabular Representation (1) Year Annual Profit Increase in Profitability (from previous year) Current Profit 540,000 Year 2012 574,000 34,000 Year 2013 611,400 37,400 Year 2014 652,540 41,140 Year 2015 697,794 45,254 Year 2016 747,573 49,779 As evident from the above graphical representation it is evident that if the proposed strategy of the company works out, the profitability would increase irrespective of the increased annual depreciation expense. Another important factor to consider is that due to the increase expenditure of the company on account of maintenance, depreciation and fuel expenditure, the cost per unit of the company is likely to increase, and if the company wishes to maintain its current and future level of profitability, it is pertinent that it incorporates the impact of the increase price in the selling price unit. The increase selling price might deter the customers from obtaining the product and services of the company. But since the company is planning to offer modern range of goods, the revenue is most likely to increase. (6) Organization of business accounting procedure Research The following were use as the primary sources for the research Jean Murray. “Steps to a Business Record Keeping System that Works” http://biztaxlaw.about.com A general understanding of how a simple manufacturing concern or service provider records the day to day transactions pertaining to receipts and payments. A general understanding of the ledger system of accounting maintained by most of the manufacturing concerns an service providers Planning and Ordering Why is a proper system of accounting important for any organization What are the steps in setting up a proper system of accounting How the data should be captured How the relevant information should be extracted out from the relevant data What are the primary statements for assessing the profitability of the company Presentation In order for the Lampeter Builders’ Merchants to manage its operations effectively and efficiently it needs to implement an accounting system which correctly record and process all the transactions of the system. It is of prime importance that the company implements an accounting system which caters only the relevant information and discards all the rest; otherwise the efficiency of the system would be greatly affected. [7] The first and foremost step in creating an effective accounting system is the capturing of the information. It is imperative that all the important facts pertaining to the transactions such as procurement of materials, payments of wages and salaries, payment of utilities and travelling expenses etc. are captured. In addition to expenditures, receipts transactions in respect of sales should also be recorded appropriately. The important thing to consider at this point is to capture all the data at first and then analyze what type of useful information can be extracted out of the recorded data. [7] The second step is to check and identify the important elements in the captured data which can be further utilized. For example, if the company only operates in a single and country and does not have any foreign operations, the currency in which the transaction would take place would be the same, thus it would not be necessary to capture that particular information again and again. In addition, if the data capturing system of the company is not properly recording the reason for which a particular expenditure was occurred, (e.g. why the extra material was purchased during the current month?) the system would be of no use. Recording of transaction is the next step, which can be defined as putting into use, all the relevant captured data. This in accounting terms is referred to as the book keeping, with all the debit and credit entries. The following table presents an example of a format based on which the important records pertaining to the transactions should be kept. Graphical / Tabular Representation (1) Date of transaction Payment / Receipt Invoice Number Particulars of transactions Amount Name of authorizing personnel VAT Tax rate VAT Tax Amount             Date of transaction is important for cut off purposes. It means that the transaction pertaining to a month is recorded in the General Ledger of the corresponding month. Payment/ Receipt invoice number is quite significant too as in case of Purchase return/ Sales return a debit or credit note is issued in respect of the particular invoice number. Particulars of transactions are important in order to record the purpose for which the expenditure was incurred or in respect of which sale of item the amount has been received from the customer. Name of authorizing personnel is highly significant for internal control purposes. In addition, expenditures of high amounts should be authorized by the CEO himself, thus the record of name of authorizing personnel assists in identifying that the transactions were authorized accordingly. Record pertaining to taxation is also very important for the calculation and submission of tax returns to the authorities. In addition, on different items, tax is levied on different rate. After recording, in order to review the profitability of the business, the company needs to prepare three primary statements which are Balance sheet, Income Statement and Cash Flow statement. Through balance sheet, a company can analyze its assets and liabilities, increasing liabilities means that the company should cut back its expenditures or should start paying off its liabilities at a quicker rate. Increase in assets does not always represent a good sign for business. Increase in less liquid assets, such as stocks, would not be considered desirable as compared to other liquid asset of the company such as accounts receivable. Income statement analyzes the expenditure incurred and revenue generated during the period. If a company has higher gross profit margin from the previous year and lower net profit margin, it represents that the company needs to curtail its administrative expenses. Cash flow statement is another important statement which assists in identifying the cash inflow or outflow from the operating, financing and investing activities. Bibliography S[1] “VAT rates, thresholds, fuel scale charges, exchange rates” http://www.hmrc.gov.uk. HM Revenue and Customs, n.d. Web. 28 July. 2011. [2] “Building and Construction Work and VAT” http://www.hmrc.gov.uk. HM Revenue and Customs, n.d. Web. 28 July. 2011. [3] “VAT Returns: how to complete your VAT Return box-by-box” http://www.hmrc.gov.uk. HM Revenue and Customs, n.d. Web. 29 July. 2011. [4] “VAT Returns: how to complete your VAT Return box-by-box” http://www.hmrc.gov.uk. HM Revenue and Customs, n.d. Web. 29 July. 2011. [5] “Depreciation – Reducing Balance Method” http://www.bizhelp24.com. Biz help 24, n.d. Web. 29 July. 2011. [6] “IAS 36 – Impairment of assets” http://www.iasplus.com. IAS Plus – summaries of International Financial Reporting Standards. Web. 30 July. 2011. [7] Jean Murray. “Steps to a Business Record Keeping System that Works” http://biztaxlaw.about.com. About.com US Business Law/Taxes Web. 30 July. 2011. Read More