Management
School of Mechanical, Materials and Manufacturing Engineering
MM2MN1 – Management Studies “1”
Balancing the Books
Objectives and Learning Outcomes • • • • • • • Double entry accounting The balance sheet The balance sheet equation The trial balance The trading, profit and loss account Opening and closing stock The ledger
Prof John Dominy February 2013
MANAGEMENT STUDIES “1”
BALANCING THE BOOKS
Introduction Now that we have planned our business and established that it is viable, the next steps that are necessary are: •raise the finance necessary to start, •maintain the financial books, •report the financial state of the company.
Finance This is a private business which will be financed mainly from within the group. While there are many ways of raising funding in practice, this example is typical of the origins of many small businesses. The options used are: •shares - a number of people buy shares in the company. This provides funding but makes them owners of the company. They can sell their shares (in the case of a private company, only to other share holders) if they wish. The disadvantage is that, while their shares might gain value, they may also fall in value if the business fails to perform as expected. In the limit, they could lose their investment if the company collapsed. The degree of loss would depend on the type of business.
•Debentures - a fixed term loan (generally long term) to the company. A debenture is a loan, not a share. It does not change value with shares. If the business collapses then the Debenture holders are high on the list to be repaid the loan, or a proportion of it, when the company is wound up. •Loan - a simple loan on which interest is paid. In many cases, such as a bank loan, the lender will demand some security to ensure repayment in the event of the collapse of the business. Typically the loan will be secured against the houses of the owners. Our coffee business is funded as follows:
Prof J Dominy
MM2MN1 – Management Studies “1”
Balancing the Books
Objectives and Learning Outcomes • • • • • • • Double entry accounting The balance sheet The balance sheet equation The trial balance The trading, profit and loss account Opening and closing stock The ledger
Prof John Dominy February 2013
MANAGEMENT STUDIES “1”
BALANCING THE BOOKS
Introduction Now that we have planned our business and established that it is viable, the next steps that are necessary are: •raise the finance necessary to start, •maintain the financial books, •report the financial state of the company.
Finance This is a private business which will be financed mainly from within the group. While there are many ways of raising funding in practice, this example is typical of the origins of many small businesses. The options used are: •shares - a number of people buy shares in the company. This provides funding but makes them owners of the company. They can sell their shares (in the case of a private company, only to other share holders) if they wish. The disadvantage is that, while their shares might gain value, they may also fall in value if the business fails to perform as expected. In the limit, they could lose their investment if the company collapsed. The degree of loss would depend on the type of business.
•Debentures - a fixed term loan (generally long term) to the company. A debenture is a loan, not a share. It does not change value with shares. If the business collapses then the Debenture holders are high on the list to be repaid the loan, or a proportion of it, when the company is wound up. •Loan - a simple loan on which interest is paid. In many cases, such as a bank loan, the lender will demand some security to ensure repayment in the event of the collapse of the business. Typically the loan will be secured against the houses of the owners. Our coffee business is funded as follows:
Prof J Dominy