National 5 Accounting SQA

This subject is broken down into 19 topics in 2 modules:

  1. Financial Accounting 9 topics
  2. Management Accounting 10 topics
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  • 7,182
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This page was last modified on 28 September 2024.

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Accounting

Financial Accounting

Sole Trader

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Sole Trader

Definition of a Sole Trader

  • A sole trader is a type of business that is owned and operated by a single individual.
  • The owner has unlimited liability meaning they're personally liable for all the business's debts.
  • Sole traders are self-employed, so their income is considered personal income for tax purposes.
  • Sole traders' accounts aren't required to be public; unlike limited companies, they don't need to file them at Companies House.

Advantages of a Sole Trader

  • Sole traders have complete control over their business. There's no requirement to consult with or agree among shareholders or directors about business decisions.
  • Setting up as a sole trader is usually simpler and has less stringent regulations than setting up a limited company.
  • A sole trader can keep all of the profits after tax, unlike a limited company which distributes profits among shareholders.

Disadvantages of a Sole Trader

  • As a sole trader, the individual has unlimited liability for any business debts. This can be a significant risk as it can lead to personal financial loss.
  • Compared to limited companies, sole traders might find it more challenging to gain investors' interest or secure business loans.
  • Occasionally, being a sole trader can be seen as having less prestige than owning a limited company.

Sole Trader Accounts

  • The main financial statements produced by a sole trader include a profit and loss account and a balance sheet.
  • The profit and loss account shows the business's sales, costs, and profit over a specific period.
  • The balance sheet shows the business's financial position at a particular moment in time. It shows the business assets, liabilities, and capital.
  • Sole traders should maintain records of sales and expenses for tax purposes.

Financial Analysis for Sole Traders

  • It's crucial for a sole trader to regularly carry out financial analysis to track the business's performance and make informed decisions.
  • The gross profit margin, net profit margin, and return on capital are key profitability ratios a sole trader would use.
  • Liquidity ratios like current ratio and quick ratio would help assess the business's ability to pay short-term debts.
  • Cash flow forecasts are also valuable tools to manage finances, identify any potential shortfalls, and arrange necessary funds in a timely manner.

Legal Obligations

  • Sole traders need to register with HM Revenue and Customs (HMRC) for self-assessment tax.
  • They need to pay income tax on their business profits, national insurance, and possibly VAT, depending on their turnover.
  • They should maintain accurate financial records to calculate these taxes correctly.
  • Sole traders are also regulated by general law such as contract law, employment law, and health and safety law.

Course material for Accounting, module Financial Accounting, topic Sole Trader

Accounting

Management Accounting

Costing Theory

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Costing Theory

Understanding Costing Theory

  • Costing theory is a significant element of management accounting which helps in cost calculation, cost control, and cost reduction.

  • It tends to focus on understanding how various costs behave so that they can be predicted, managed and used in decision making.

  • Two basic types of costs are Fixed Costs (do not change with the level of production) and Variable Costs (change in line with the level of production).

Importance of Costing Theory

  • Understanding costing theory is vital for budget preparation, which is a key responsibility of management accountants.

  • It helps in determining the cost of a product or service, which is critical for pricing decisions.

  • Costing theory is crucial in analysing the profitability of different products or operations within a business, helping to inform strategic decisions.

Costing Techniques

  • Absorption costing includes all costs (direct, indirect, fixed, and variable) associated with production of each unit of output.

  • Marginal costing only considers variable costs, assuming that fixed costs are associated with time periods rather than units of output.

  • Activity-based costing (ABC) assigns costs to each activity based on resources consumed by those activities.

Key Concepts in Costing Theory

  • Contribution Margin (CM): This indicates the profitability for each item sold, calculated as Selling Price minus Variable Cost.

  • Break-even analysis: It is a technique for determining the level of sales at which a project or a company will neither make profit nor incur loss.

  • Overhead costs: These are business costs not directly associated with the production of goods or services but are vital for operations.

In a nutshell, understanding costing theory is key for efficient financial management and strategic decision-making, helping to predict and control costs, guide pricing and budgeting decisions, and analyse profitability.

Course material for Accounting, module Management Accounting, topic Costing Theory

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