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Business Law and Practice 1
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In depth, detailed business law and practice 1 notes. They contain explanation, the law and worked examples.
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BLP 1,Business Law and Practice 1
Glossary
Income This is what the business is trying to produce. It is the money
received for work or through investments
Expenses Items paid for which are necessary to maintain the earning
capacity of the business e.g. stock bought for resale,
electricity, wages, repairs
Assets Assets are the result of expenditure. Assets differ from
expenses though as they give rise to a benefit which can be
spread over a longer period and which increase the earning
capacity of the business e.g. premises, machinery, vehicles,
cash and debtors
Liabilities Amounts owing from the business e.g. bank loans and
creditors
Double entry book Bookkeeping system to record their day-to-day transactions.
keeping A method of recording transactions where for every business
transaction, an entry is recorded in at least two accounts as
a debit or credit. In a double-entry system, the amounts
recorded as debits must be equal to the amounts recorded
as credits
Net profit Net profit = total income – total expenses
Gross profit Gross profit = sales – cost of sales
Trial Balance List of the debit and credit balances on the accounts of the
business
Trading Account Shows the sales of the business minus the cost of sales e.g.
purchasing the stock which is sold
Profit and Loss Account Follows on from the trading account with the addition of any
other income and the deduction of the remaining expenses to
produce the net profit
Balance Sheet Shows a company’s assets and liabilities at a specific point in
time to show the business’s worth/value at a specific point in
time
Net worth Net worth = assets – liabilities
Prepayment This is where a payment has been made in the financial period but
service will be utilised in the following financial period
Accrual This is where a service has been used in the period but no payment
made so an accrual needs to be made in respect of that service
which has been used
Bad Debts Written Off This is where a debtor may not pay e.g. they’ve gone insolvent.
Bad debt shows as an expense in P & L Account.
It reduces the value of the debtors shown within current assets on
the Balance Sheet.
Bad Debt Provision This is where there is a doubt as to whether a debtor will pay.
Provision for bad debts shown as an expense in P & L Account.
It reduces the value of debtors within the current assets on the
Balance sheet
,Business Law and Practice 1
Depreciation This is where the cost of a fixed asset is written down over its
estimated useful economic life.
Depreciation is shown in the expenses section of the P & L Account
and the cumulative depreciation will reduce the fixed assets on the
Balance sheet
Stock The costs of good sold is:
Opening stock + purchases – closing stock
Opening and closing stock are shown in P & L Account to calculate
cost of goods sold and closing stock is shown as a current asset on
the Balance sheet.
Work in Progress Opening WiP is deducted from profit costs (income) and closing
WiP needs to be added to profit costs.
Opening WiP and closing WiP shown in income section of P & L
Account.
In Balance Sheet Closing WiP is shown as a current asset.
Strategic report This is a statutory requirement under S 414A CA 2006 (small
companies are exempt). It contains a review of the company’s
business designed to enable the performance of the company
to be measured and assessed.
Review and Chairman’s This is not a strict requirement, but a Chairman’s Report is
Statement often produced by quoted companies (quoted company is a
company who has its equity share of capital officially listed on
a particular stock exchange). The report usually sets the scene
for the accounts, in terms of what has happened in the life
of the company during the year. It should be read with a
degree of care as the Chairman will inevitably put the best
possible gloss on events of the past year.
Directors report and This is a statutory requirement under S415 CA 2006. The
responsibilities contents of the report are stipulated by the Act, but
essentially it comprises factual information about the
company, a business review and confirmation that the
auditors have been supplied with all relevant information.
Small companies are exempt from having to include some of
the statutory information.
Auditors’ report This is a report given by auditors. Auditors are required to say
whether in their opinion the accounts give a true and fair
view of the financial state of the business.
Financial statements Cash flow statement
Contains the details of all cash receipts (inflows) and
payments (outflows) into and out of the company during the
year. The payments and receipts are grouped into various
categories according to whether they’re connected to the
company’s main trading activities, investments or something
else. This statement highlights the incoming and outgoing of
, Business Law and Practice 1
cash and is therefore an important tool in assessing the
performance of the business.
Profit and Loss Account (and statement of Comprehensive
Income)
This statement is a FRS 102 requirement. It shows all gains
and losses of whatever nature that have arisen during the
company’s accounting period. Basically a summary of events
which have occurred during the year which have had an
immediate effect on the wealth of the business but which
aren’t necessarily reflected in a conventional P & L Account
e.g. revaluation of premises. This statement can be combined
with the P & L Account.
Balance Sheet (and nature of change in equity)
Once the post-tax profit of a company has been calculated,
directors decide how much of the profit should be
distributed to shareholders as a dividend. This is an
allocation of profit and could in theory be shown in the
appropriation account in the same way as a partnership
shows how profit is allocated. However, for companies,
dividends are shown in a separate statement called a
Statement of Changes in Equity. Dividends are not shown
until they have been paid. This statement isn’t confined to
dividends, it will also, for example, detail the issue of new
shares
Notes to the accounts
FRS 102 and UK Adopted IAS require accounts to be
accompanied by explanatory notes. The notes often run to
many pages and they are usually the most informative part of
the accounts as they expand on the information which
appears in the P & L Account/Income Statement and Balance
Sheet
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