Definitions and Concepts of Financial and Business Management, for example: What is an Asset? What menas Depreciation? What is the Break Even Point? I also elaborate on different Costs (e.g. opportunity cost, variable costs, indirect costs, etc.). This document is very helpful in getting a basic un...
, Concepts and Definitions
Accounting= collecting, analysing and communicating financial information
Account payable vs trade payable=both accounts payable and trade payables are current liabilities that need to
be paid in the short run. There is however a small difference. Accounts payable concern all payables, including the
trade payables as well as e.g. wages payable and dividends payable; trade payable=important source of finance
Asset=resource with economic value, owned with the expectation to provide future benefit;
• often stated as: Property, Plant and equipment, Patents and trademarks, Trade receivables, etc.;
• does not have to be a physical item (e.g. patents)→tangible vs intangible assets;
• characteristics:
1. Probable future economic benefit (either through the item’s future uses within the business or through its
future hire or sale)
2. Benefit must arise from past transaction or event (an agreement on futue purchasing of equipment is not
an asset yet)
3. Business must have the right to control the resource
4. Asset must be capable of measurement in monetary terms (with a reasonable degree of reliability)
• current assets=short-term:
o held for sale or consumption
o expected to be sold within a year
o held principally for trading
o cash or cash equivalents
• non-current assets= “fixed assets”; long-term operations; assets that do not meet the definition of current
assets; can be (non-)tangible
→whether the asset will be current or non-current differs per business and purpose of the asset
o can be finite=provide benefits to a business for a limited period of time (used up over time-Depreciation)
o can be infinite=provide benefits to a business without a foreseeable time limit
• Impairment of non-current asset=”impairment loss”=loss of value of an asset via some fundamental
change in the commercial or technological world. When the amount carried by the asset is higher than the
amount that could be recovered from the asset through continued use or sale
! value on statement should be reduced to the recoverable amount!
Bad debt=when selling on credit and the company does not get the money paid in time (trade receivables increase)
Bank overdraft=current accounts with negative balance; type of bank loan
Costs ! Cost price-depreciation=net book value
Costs= The amount of resources, usually measured in monetary
terms , sacrificed to achieve a particular objective (=full costing)
• Cost of capital=discount rate; the cost to the business of the finance needed to fund the investment; high
discount rate→value of cashflow in the future will be low
• Historic cost=initial purchase price; are always represented in financial accounting;=past costs
• Job costing=the way in which we identify the full cost per cost unit; sum of direct costs+share of the cost
creating the environment in which production can take place (indirect cost)
• Direct costs=can be identified with specific cost units
(e.g. direct materials/labour); costs needed for performing the ! Whether s cot is indirect or direct depends on which
service or product item is to be costed
• Indirect costs=overheads; all other elements of cost;
items that cannot directly be measured in respect of each particular cost unit→although they form part of the
cost of each cost unit, they cannot be directly related to individual cost units; costs needed for running the
business itself
• Opportunity cost=cost of letting an offer go; e.g. buying a car for 5k and keeping it while someone offers
you 6k; real cost=6k for keeping it; are always represented in management accounting
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