Chapter 24 Mind Map - Coggle Diagram
Chapter 24 Mind Map
What are accounts and why are they necessary?
financial records of a business --> accounts
should be kept up to date and accurate --> accountant's job
final accounts --> record the main financial results over the year and the current worth or value of the business
How a profit is made
Profit = Revenue - Cost of making products
this surplus can be increased by:
increasing revenue by more than costs
reducing the cost of making products
a combination of 1&2
Why profit is important to private sector businesses
Reward for enterprise
successful entrepreneurs have many important qualities and characteristics and profit gives them a reward for these
Reward for risk taking
Entrepreneurs and other investors take considerable risks when they provide capital to a business - profits reward them for taking these risks by allowing payments to be made
These payments provide incentives: to business owners to try make their business even more profitable; to investors to put more capital into profitable businesses
Sources of finance
Profits after payments to the owners are a very important source of finance for businesses - this allows for expansion
Indicator of success
When some businesses are very profitable, other businesses or new entrepreneurs are given a signal that investment into producing similar goods or services could be profitable. If all businesses in an industry are making losses, this would not be a good signal to set up in that industry.
Main features of an income statement
if the business is making profit
is it higher/lower than last year?
if lower, why is profit falling?
is it higher or lower than other similar businesses?
if lower, what can we do to become as profitable as other businesses?
if the business is making loss
is this a short-term or a long-term problem?
are other similar businesses also making losses?
what decisions can we take to turn losses into profits?
the amount made by the business from the sales of its goods or services
calculated by multiplying price by the amount sold
Cost of Sales
the variable cost of production for the goods or services sold by a business
includes the cost of the material used in creating the good plus the direct labour costs of producing the good
profit calculated before fixed costs are considered
gross profit = revenue-cost of sales
does not make any allowance for overhead costs or expenses
cost of sales is not necessarily the same as the total value of goods bought by the business
calculated by deducting all expenses and overheads of the business from the gross profit
also include any non-trading income
depreciation=the fall in the value of a fixed asset over time--> included as an annual expense of the business --> recorded as an expense in income statement
profit left, or reinvested back into the business, after all payments have been deducted
income statements for limited companies will also contain:
corporation tax paid on the company's net profits
the dividends paid out to the shareholders
the retained profits left after these two deductions
results from the previous year to allow for easy comparisons.
Using income statement in decision making
managers can use the structure of income statements to help them in making decisions based on profit calculations