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Accounting Basics

Assess how a specific business applies an accounting concept or policy to their accounting records.

What is a Concept: Concepts are a set of basic principles that are used as guidelines for accountants all over the globe when they are doing their accounting records? There are many concepts and here are some of them: accruals, consistency, prudence and materiality. Jonathan doesn’t have to follow these rules as it is not the law, however, it is good to use those rules because they will help Northern Car Repairs to compare with other business.

Consistency Concepts:

Consistency concepts are very important for business because it helps a business is a lot things and it will defiantly make a lot things easier for Jonathan. For example, if Jonathan is connected to one accounting method that he uses, it will be a lot easier for Jonathan to account as he will be using the same method for a lot of years and by doing that Jonathan will be able to compare the accounts.

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However, consistency concepts does not state that Jonathan must follow the same method all the way, Jonathan can change this accounting methods for Northern Car Repairs if the new method is better than the old one. If Jonathan does change the method he must mention the change in Northern Car Repair’s financial statement stating the effect and the date he changed the method.

Consistency concepts of accounting requires Jonathan to use the most appropriate depreciation method. Once Jonathan has found a method and has set the value, Jonathan and will need to stick to that method for serval years so Jonathan can compare to other rival businesses.

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By sticking to the same deprecition method Jonathan will also be able to see a pattern in his profits.

P11: Describe payment methods for business transactions.

Cheque:

A cheque is an order to a bank to pay the stated amount from the drawers account. Cheques are used for many things and here are two examples: paying bills, paying someone else. There are many types of Cheque and here are some of them: Order Cheque, Open Cheque, Crossed Cheque and Postdated Cheque.

How to write a Cheque:

First Jonathan will write the name of the person or the origination/business he is paying. After Jonathan has done that he will need to cross any blank spaces on the cheque so people don’t add any extra number at the end. Then Jonathan will need to add details to the payee line (for example: the account number). After completing that, Jonathan will keep the cheque stub that contains all the details.

Advantages of using Cheques Disadvantages of using Cheques

Cheques are very safe if all the blank spaces are crossed. Cheques are not suitable for small amounts.

You do not have to worry about counting notes or making any mistakes. Depositing cheques at a bank is very time consuming

Your cheques can be traced if you lose them so you do not have to worry about losing them. Cheques may be valueless if the drawer has no money in their account.

A Cheque requires your signature which means no one else can use it if you lose it. Checks require signature which means if you rush your signature, it will be returned because it would not match on the file.

Debit Card:

A Debit card is a payment card that can be used instead of cash. Debit cards helps you make very easy and secure purchase- these purchases can be online or in person. A Debit card takes money straight from your checking account, so the money is all yours and you’re not borrowing any money. To get a Debit card all you need to do is ask your bank and it is a very easy process because all you need to do is fill out an application with the bank.

Advantages of using a Debit Card/Disadvantages of using a Debit Card

It is very hard to steal from your debit card as the thief needs to know your pin and also you can report to the bank about your missing card and they will block it so the thief won’t be able to take any money out. If someone gets hold of your card and you forget to report it, they can draw money from your card instantly with your pin.

You do not have to carry cash around with you if regularly use debit card, also with your debit you can go to an ATM and take out however much you need. Debit card does not help your credit score which means you cannot build it. This means you will have a high interest rate.

You won’t go into a debt because debit cards limit spending to what you have in your checking account. Not every shop/store takes debit card.

Easy to keep track of you’re spending as the transactions are posted online right away. The bank fees on your debit card can add up to a large amount.

Credit Cards:

A Credit card is a plastic card that allows you to spend your credits to make purchases and reduce debt. A Credit card kind of works as a loan- your lender will give you a credit limit and you can spend as much as you want of that credit before you need to pay it back. There are about seven types of Credit cards and here are some of them: money transfer cards, purchase cards, reward cards and balance builder cards.

Advantages of using a Credit Card/Disadvantages of using a Credit Card

A Credit card is a lot safer than carrying cash around with you. Other fees can quickly build up, for example you can be charged if you miss a payment or if you accidently spend past your credit limit.

You can purchase items using your credits even if you are running low on money. You have to pay annually, which can be up to ?25 a year and also this can be changed as generally it is the more perks you want, the higher the cost you have to pay.

Cash:

Advantages of using Cash/Disadvantages of using Cash

You are limited to how much you can spend which means you won’t be able to spend all the money. Cash is almost to track so if you lose it, you probably won’t be getting it back.

No transactions needed like there are with cards. Carrying a lot of money on you increases your risk of getting robbed.

Everybody takes cash. You and your seller has to be together or it is impossible to pay them with cash.

Standing Orders:

A standing order is a way of setting up a fixed payment from your account where a person instructs their bank to pay another person a fixed amount. To set up a standing order you will need the name of the person you are paying, their 8-digit account number and their 6-digit sort code and the payment reference.

Advantages of using Standing Orders/Disadvantages of using Standing Orders

Allows customer to make the right payment at the right time. If on payment is made wrongly, the customer will continue to make wrongly payments, and this is very hard to spot. This mistake will effect both the customer and you as you won’t be getting the money and the customer will lose a lot of money.

Easy and very quick for the payer to set up. There are no payment notifications which means there is a risk of late payment. This means customers are not paying in time which can cause liquidity and cash flow problems.

Helps originations/businesses collect regular payments on time. Only suitable for regular and fixed payments.

It is usually free for both the payer and the payee. It has less flexibility- takes a lot time to change the amount or the date of the payment.

Direct Debt:

Direct Debt is when you collect payment directly from your customer’s bank account whenever a payment is due. Direct debits are mainly used for recurring payments. Some examples when you might use direct debit is when you are paying your gas and electricity bills.

Advantages of using Direct Debt/Disadvantages of using Direct Debt

You can collect payments whenever they are due which means there will be no late payments. Before paying you need to manage your account to see if you have enough money to pay the bills.

Direct Debt is flexible which means you can change the amount without needing the customer to re-authorize. Your payment may be set too high, which you might not be able to afford to pay.

It improves your cash flow as there are no late payments. If you don’t have enough money to pay the bills your bank might refuse to pay them which may charge you from ?5 up to ?25.

P12: Explain the purpose of a bank statement and the need for a bank reconciliation statement.

Bank Statement:

A bank statement is a record of your bank balance and the amounts people have deposited into your bank and withdrawn from your bank, over a period of time. Knowing this information is very crucial because then you will be able to find out if you are paying any monthly fees or any other extra charges.

Bank statements are very important because a bank statement acts as your spending record. So it will provide you a list of all your spendings, particularly if you choose to pay with cheques, credit cards and debit cards, this means that your business will be able to see where you have spent the money when you spent that money and most importantly how much money you spent.

Bank Reconciliation Statement:

Bank Reconciliation is a statement report which matches your cash balance on a company’s balance sheet. A bank reconciliation should be checked regularly for all the bank accounts you have to see that your company’s cash records are 100% correct. If it isn’t getting checked regularly, it may lead your business to overdraft. Bank reconciliation also checks if there are any missing deposits, any cheques missing or any unexpected actions. This is very important because by completing that process you can catch fraud before it’s too late because the sooner you inform your bank about this the more protection you will have.

Another reason why bank reconciliation keeps transactions status updated. Just because you have spent a payment do not mean that the person has received it, bank reconciliation tells you if there are any cheques you wrote a while ago are paid or not. This is a very big advantage of bank reconciliation as you won’t be able to miss any payments.

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Accounting Basics. (2019, Nov 27). Retrieved from http://studymoose.com/accounting-basics-essay

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