35 years: Credit & banking
In this second video of the series, Nick expands on the previous video by exploring how the accounts - the Balance Sheet, the Profit and Loss and Cashflow - interlink and how transactions ripple through these three accounts.
In this second video of the series, Nick expands on the previous video by exploring how the accounts - the Balance Sheet, the Profit and Loss and Cashflow - interlink and how transactions ripple through these three accounts.
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11 mins 53 secs
This essentially provides an insight into the impact of different transactions on a company’s financial statements and how they’re balanced and accounted for in the accounts.
Key learning objectives:
Given the contexts, identify the appropriate impacts on the company accounts
Define the Prepayment and Accruals concept, and give an example
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Context 2: On day 2, we buy a delivery van for £20,000 cash, and £50,000 of stock on 60-day credit terms.
Context 3: The company starts trading on day 3 – The company sells £50,000 of stock for £65,000 but incurs £5,000 of cash costs. The sale is on 75-day credit terms. It replaces the stock it has sold and buys £50,000 of stock as before on 60-day credit terms.
Prepayment & Accruals Concept - Applying the income and costs of a transaction to the time period in which they are incurred, not the time period in which they are paid.
In the case above, the sale of the stock happens on day 3 even if the customer is only going to pay for it on day 78. As we have bought it on day 2 for £50k, we have made a £15k profit on day 3 when the stock is sold and that is recognised in the accounts on day 3.
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