unit 3

one function of money is a unit of account. money can be used to place value on goods and services. you exchange money for an equivalent in goods and services. 

another fiction of money is means of exhange. money is used to sell, buy or trade goods and services. money makes it simple to do this; otherwise you would have to swap products or services in order to trade.

also a function of money is store of value. money has a value. it can be stored, for example in a bank, and then used in the future to buy goods and services.

money is also used as a legal tender. money is the legal means you use to pay for goods and services. legal tender is the national currenecy of a country. it is the official method of payment.

factors influencing your view of money:

personal attitude- attitudes towards risk and rewards. 

life stages- as you go through life stages your priorities and needs change

culture- background or culture including religious beliefs may shape the view of money

life events- such as moving home or being made redundant can affect the importance of money

external influences- these are outside of your control, such as the economy or avalibility of jobs

interest rates- can impact whether you save or borrow. low rates are good for borrowers but not for savers, while high rates are good for making money expensive to borrow but savers recieve more on their deposits.

its important to plan expenditure to avoid getting into debt, why plan expenditure?:

• to avoid getting into debt
• control costs
• counter the effects of inflation
• provide insurance against loss or illness 
• set financial targets and goals 
• generate income and savings 
• manage money to fund purchases
• avoid bankruptcy
• maintain a good credit rating
• remial solvent 
• avoid legal action and/or repossession of goods or assets 

cash(notes and coins)

• accepted in most places
• can be stolen or counterfeited
• cannot be used online

debit card

• payment taken directly from the cardholders account
• secure method of paying 
• contactless
• small risk of overspending
• can be used online
• card may be stolen or hacked

credit card

• paid directly by the card issuer
• short interset free period
• charged interset
• risk of getting into debt
• used online
• can be hacked or stolen
• fee charged for using credit card

cheque 

• a written order to pay a sum of money from a bank customers account to another person
• secure as only payee can cash the cheque
• takes three days for the amount to be avalible 
• some places no longer accept check

electronic transfer direct payment

• payment is made directly between bank accounts
• easy to set up 
• transfer instant
• bank details of third party is needed

direct debt

• an instruction to a bank authorising a third party to collect amounts of money from a persons account
• simple way to pay regular amounts
• amounts may vary 
• must have sufficient funds in their accounts

standing order

• an instruction to a bank from an account holder to make regular set payments to a person or organisation
• payments do not change
• payments made automatically
• must have suffcient funds

prepaid cards

• widely accepted
• cannot overspend
• if lost or stolen cannot be recovered

contacless

• fast, easy and secure
• amounts less than £30
• can lose track of spending 

charge cards

•  short term intersets free loan
• dont need to pay immediately but must be paid in full 
• annual fee is payable

store cards

• only accepted by the store that issued it 
• benefits from discounts and loyalty schemes
• intersets payable on balance
• risk of overspending

mobile banking

• made on electronic devices
• check balances, make payments and transferes
• secure and flexible
• may not be able to access the full range of banking 

BACS and fast payments (electronic payment from one bank to another)

• takes 3 days to transfer
• fast paymnets within 2 hours
• usally no fee

CHAPS- electronic payment from one bank to another

• guaranteed same day transfer as long as bank instructed by a certain time
• a fee is charged

standard account

• no banking fees
• must have a fair credit rating
• cheque book and bank card, often have contactless
• set up direct debts and standing orders
• salary can be paid straight into the bank
• overdarft facillity- often high intersest

packaged preimium account

• additional features for a monthly fee
• benefits such as insurance, discounts etc. may have to be paid for even if not wanted
• interest on credit balances
• cash back on bills paid by direct debt
• special rates on intersest on overdraft

student account- aimed at learners in higher education to help them manage their finances

• interest free overdraft up to a certain limit
• if overdtaft exceeds limit interest can be high
• debit card
• free gift or travel discounts

basic account

• aimed at customers with low credit score
• no overdraft
• no banking fees
• debit card
• can set up direct debits

overdraft- a short term loan arranged with the bank to borrow money up to agreed amount when the balance of the account hits zero

• usually free to set up
• interset is high and will be charged for the use of the onverdraft. if you go over the limit or have an unaranged overdraft there will be charges.

perosnal loan- can be used to by expensive things such as household goods or car. a fixed amount is borrowed and pay it back in set monthly instalments usally over 1-5 years/

• monthly instalments allow for expenditure plan
• arrangment fees may be added on and if payments are not paid they can lose the asset it is secured against

hire purchase- a depsot is put down and monthly instalmants are paid between 1-5 years, once the payment period is over the item is owned by the payee

• allows you to buy expensive items 
• you cannot sell the asset and if payments are not made assests may be taken away 

mortgage- a loan toaken out to buy a property, usually 25 years or more and is paid off in monthly instalments. 

• allows you to buy your home and spread the costs out over a long period of time. fixed or tracked mortgage rates can help make payments affordable.
• an increase in intersest rates may affect the ability to pay back the loan. the assest is used as security againts the loan, if payments are not made the asset can be repossessed. 

credit card- can be used to buy goods and services. you can only spend to the amount of the credit limit, at the end of the month a statement shows how much is owed.

• if paid in full at the end of the month interest isnt paid
• if you pay the minium amount shown ypu will pay intersest on the remaining amount.
• rates are higher than a perosnal loan

payday loan- a short term loan, usually for small amounts, often people who need quick cash to pay bills a fee is charged.

• can help cash flow
• can be expensive 

individual savings accounts- allows saving without paying tax on the interest. there is a limit in the amount you may put in each year. notice may be given in order to withdraw the money. there are two types of ISA, a cash ISA a savings account where interest is paid tax free. stocks and shares ISA where funds are invested in shares or bomnds and profit is earned tax free. cash ISAs are less risky as stocks and shares have the potential of financial lose and they also charge managment fees. there are also innovative fianace ISA, interest is earned from leding money to other people through peer to peer lending. help to buy ISA for first time buyers to help them save to buy a property. 

deposit and savings account- an easy access account which pays a variable amount of interest which is taxable. a fixed depsoit account pays a set amount of interset over a set period of time. you cannot make withdrawals in this period.  

perimium bonds- do not pay interest, instaed savers are given the chance ti win tax free cashprize every month. savings are secure but they will recieve no return on the money unless you win. you can cash in the preimium bonds when they are no longer wanted. 

bonds and gilts- are fixed interest securities issued by companies and the government. they pay investors regular interest over a set period as long as the issuer is able to pay the interest. the value of the bonds and gilts can fall.

shares- give investors part ownership of a company, in return they get payments or dividens per share based on the performance and profits of the business. the share can go up and down. the investment can be lost if the company underperformes. liability to the company debt is limited to the number of shares purcahsed. large dividen returns may be subjected to tax.

pensions- are long term saving schemes desgined to help save for retirement. employees pay into state pension through national insurance. workplace pensions put a percentage of an employees pay into the pension scheme, with a contribution usually added into a private pension. the pension may include the option to take a lump sum. 

motor insurance

• satisfies the legal requirements for car owners to have insurance
• three levels of cover third party, third party fire and theft and fully comprehensive
• can build a no claims bonus
• provides protection against liability claims from other drivers
• expensive for new and young drivers
• policy excesses can add to the costs in the event of a claim

home and contents insurance

• home insurance covers the cost of repuilding or repairs due to fire, flooding or subidence etc
• contents isurnace covers the loss or damge to personal posessions
• additional security precautions can reduce preimums
• only covers the costa of rebuilding the property not the market value

life insurance and assurance 

• life insurance pays out a sum of money in the event of a death
• life assurance is a mixture of life insurance and investment
• can be used as collateral
• pay out may be larger than the total amount of preimum paid
• life assurance pay outs are linked to the performance of investment
• pre-existing medical condtions may not be covered

travel insurance

• provides cover for delay, cancellation or curtailment of the trip
• provides cover for loss of perosnal possessions while on the trip
• provides cover for emergancy medical expenses
• pay outs may not cover the full amount of the financial loss
• high risk sporting activities usually require an additional premium
• pre exisitng medical condtions are not covered

pet insurance 

• pay for vet bills that can be expensive
• opt for lifetime cover for serious illnesses for addtional premiums 
• cover provided for personal injury or damge caused by the animal
• pre exisitng medical condtions are not covered 
• some policies will limit the amount of cover of medical exepnses covered
• vaccinations are not covered.

health insurnace

• covers some or all private medical costs with convinient treatment times
• you can shppse tje types of illnesses and treatment you want to cover
• pre exisitng medical condtions are not covered
• medical condtions which arise during initial period of the policy may not be covered 

financial organistaions

bank on england

• UK's central bank- regulates and supervises banks, building societies, insurance companies, investment companies and credit unions.
• responsible for maintaining the UK's monetary and financial stability.
• sets interest rates- if they increase the cost of borrowing will rise
• issues legal tender
• independent from the government.

banks 

• owned by their shareholders
• offer customers a range of finacial service
• are reliable secure and private
• may charge for a certain account and service
• in the event of a bank failing, saving deposits are only secure up to a cetai limit £85,000

building societies

• owned by their members (account holders)
• provide financial services
• can offer better interest rates and savings than banks
• fewer braches leaing to poor access

credit unions

• financial cooperatives and run by their members
• not for profit
• offer members savings accounts, current accounts and loans
• more limited funds and opportunties than commercial banks
• good cooperative and group feeling

national savings and investments (NS&I)

• sells savings and investment products eg premium bonds
• money invested in products used to finance government activities
• poor interest rate, no intrest payments on premium bonds
• some of its services can be accessed from high street post offices

insurance companies

• offer policies which compensate policyholders agains personal injury, loss or damage to property and other risks including third party liability
• also offer life insurance and pension plans that provide financial security for policyholders depending on the performance of investment funds.

pension companies

• businessed that sell policies to customers allowing them to save into personal pensions schemes
• funds locked into savings they charge for early withdrawal
• projected income is based on figures that may change overtime

prawnbrokers

• individuals or businesses that loan money against the value of a persons assests
• interest is charged on loans for the period during which the money is borrowed
• items not bought back within a certain time may be solds to recover the debt
• instant cash avalible if the asset has vaule
• short term loan high costs

pay day loans

• businesses that offer short term loans to people 
• immediate cash avalible even if there is a poor credit score
• very expensive and easy to get into deeper debt

bank branch

• visit the banks on the high street
• over the counter transations or self service machines
• sell products and services within store
• acess limited to brach opening times
• travel to get there
• full range of services offered
• face to face contact

telephone banking 

• customers carry out simple transactions over the phone 24/7
• services automated
• can speak directly to an advisor
• very effcient
• overseas call centres are not always avalible

postal banking 

• send paper statments
• pay cheques through the post but may be delayed
• now going paperless

online banking 

• manage their accounts on the computer or phone
• check their balance and pay bills
• limited than a branch
• access 24/7
• forgotten passwords
• security issues

finacial conduct authority

• regulates the conduct of finacial services provides
• authorise businesses to trade and supervise their work and change poor parctices
• responsible for making sure that consumers are provided with a wide range of products and services
• its independent body funded by the organistaion. its regulated and accoutable to parliment

finacial ombudsman 

• where consumers turn to if they have unresloved compaints about the service they have recieved for a fiancial service
• gives advise or makes decsions based on the facts given and the service is impartial
• the service was set up by law as an indepnednet public body. it is not a regulatoe and connout fine businesses

fiancial services compesation scheme

• fund to pay consumers compensation for fiancial loss if the business is unable to pay 

consumercredit legalisation- the consumer credit act 1974 regulates credit card purchases and gives consumers protection when siging loan and hire purchases agreements it covers interest rates, credit limits, cooling off periods and access credit flies.

officer of fair trading- until april 2014 the oft was responsible for protecting consumer interests. this part of its work is now the responsibility of the FCA.

citizens advice- a charitable organisation providing personalised, free, confidential and impartial advice on a varety of finacial and non finacial issues.

• helpful for low income citizens and for first point of call
• advisers are volunters who may not be financial professionals. they may not be able to deal with complex financial problems.

independent financial advisers- professionals who provide independent advice and guidance on a range of financial products such as mortgages. they have to be qualified and their conduct is subjected to strict regulation by the government.

• they do not recieve commission from any products they reccommend
• they charge for their services

price comparison websites- they compare features and prices of different types of financial products provided by a range of suppliers.

• allow customers to choose the product best for their needs and budgets. they are free to access, interactive, personalised to the needs of the customers. saving them time
• requires a computer or phone and not all suppliers are accessable. it can be cheaper to purchase directly from the supplier

debt counsellors- agencies who provide financial advice to consumers struggling with debt. organsiations such as the charity national debtline provide debt advice and information on how to manage personal debt.

• perosnalised advice on budgeting and dealing with creditors. some offer online budgeting toold as well as web chat services
• authorised by the FCA
• some individuals debt counsellors charge a fee for their services

the money advice service- a government agency providing free and impartial money advice to help improve individulas finances.

• online tools, web chat and calculators help with budgeting
• requires a computer with online access to use the budgeting tools. some consumers may not feel confident using the tools

individuals voluntary arragmnets and bankruptcy- when a person is unable to pay all the money they owe to creditors, two options are avalible:

• an IVA is an agreement that an individual undertakes with their creditors to pay off all or part of their debts
• a person who is declared bankrupt will have to use some of their assets to pay off their debts.

purpose of accounting

recording transaction- accountants record all money coming into and going out of the business. this enables them to keep track of payments received and ensure bills and taxes are paid on time.

managment of a business- are responsible for planning, monitoring, controlling finacial side of the business

compliance- all businesses have a rresponsibility to comply with fiancial reporting requirements in accordance with laws and regulations. internal accounting helps control the combating of fraud

measuring performance- accountants measure how well the business is performing financially through its: gross profit and net profit, sales revenue, effeciemcy in collecting money owed to the business, expenditure and costs.

control- accounting also tracks, trade recievables: debts that are generated by the sale of products or services between businesses (money owed to the business). trade paybles:debts that have been created as a result of purchasing products or services from other businesses (money owed by the business)

capital income- money used to set a business up, it is a long term investment

loan- money lent to a business by an investor such as the bank. the business will pay back the loan with interest, usually monthly instalments over a few years

mortgages- loan usually used to buy property such as business premises. the mortgage will be secured against the property purchased. the business will pay back the mortgage with interest usually over 25 years

shares- issued by the comapny to shareholders who own the business, as investors in the business, shareholders may recieve a dividend.

owners capital- the owner invests their own personal savings into the business, the owner may be a sole trader or a partnership

debentures- a type of bond issued by large companies to raise money. investors recieve interest on their loan which is repaid in full by the company on an agreed date.

revenue income- income recived by the business on sales of its good or services

cash sales- through over the counter transactions

credit sales- through sales using the method of credit

rent recieved- when a business rents out a property it owns

commision recieved- when a business acts as an agent for another business and recieved a percentage of every single transaction

interest recieved- money earned on savings or lending

discount recieved- when a business pays a reduced price for goods or services

revenue income- income recived by the business on sales of its good or services

cash sales- through over the counter transactions

credit sales- through sales using the method of credit

rent recieved- when a business rents out a property it owns

commision recieved- when a business acts as an agent for another business and recieved a percentage of every single transaction

interest recieved- money earned on savings or lending

discount recieved- when a business pays a reduced price for goods or services

revenue income- income recived by the business on sales of its good or services

cash sales- through over the counter transactions

credit sales- through sales using the method of credit

rent recieved- when a business rents out a property it owns

commision recieved- when a business acts as an agent for another business and recieved a percentage of every single transaction

interest recieved- money earned on savings or lending

discount recieved- when a business pays a reduced price for goods or services

non current assets:

• land
• buildings and premises
• machinery and equipment
• vehicles
• fixtures and fittings

intangable assets- not physical items and may be difficult to value or sell

• goodwill- the additonal value of a business. it is a measure of the number of customers and its reputation
• patents- a reconisable part of the business and have value 
• trademarks-a reconisable part of the business and have value 
• brandnames- a reconisable part of the business and have value 

depreciation- some assests such as machinery and office furniture lose their value overtime. depreciation is used to show the fall in value in the businessses accounts. straight line depreciation reduces the value of an asset by the same amount each year. reducing balance shows the loss or value as being higher during the early years.

rates- business tax on non domestick property used to fund local council services

rent- only paid by the businesses that do not own their own premises

inventory- raw materials, finished products, supplies required to run a service business

discount allowed- customers may recieve money off goods either as an incentive to purchase or buying in bulk

interest paid- on mortgages and loans

bank charges- bank account fees payable on every transaction

wages-m hourly rate paid to an employee

marketing- costs related to promoting and selling goods and services

salaries- annual sum of money divided into equal monthly payments, paid to an employee

stationery and printing- administrative costs

postage- administrative costs

telephone- administrative costs

administration- paperwork required to run a business

insurance- businesses are legally required to take out buildings, contents, public liability and employers liability insurance

water- payment for supply of water to premises

heating and lighting- payment for service such as gas and electricity

retained profit- some of the profit are kept in the business are not distributed to the owners or shareholders. the money is retained for reinvestment in the business.

• does not have to be repaid and has no interest payable
• not avalible to a new business and many companies may not make suffcient prfoits

net current assets- this money is immediatley avalible to the business eg cash which can be used to cover day to day expensiture. it also includes assets that can quickly be turned into cash. such as invoices that are due for payment

• a quick way of raising cash. selling off inventory reducues the costs relating to holding it
• may have to accept a low price for the inventory

sales of assets- vehicles, building, machinery or equipment can be sold to give the business cash. it may take time to sell assets and sometimes the amount recieved may be lower than their actual value.

• a good way of rasing funds from the assests that are no longer needed
• not all businesses have surplus assets that they can sell. slow method 

PROFIT=

SALES REVENUE-TOTAL COSTS

NET CURRENT ASSETS=

CURRENT ASSETS-CURRENT LIABILITIES 

owners capital

• investors put more money into the business
• long term option
• few additonal costs
• limited by the funds avalible to the owners
• if the business is owned by shareholders then they will expect a bigger dividend 

hire purchase

• allows businesses to obtain assets by paying a deposit then making regular payments
• asset is owned once all payments are made
• medium source of finance
• expensive compared to buying in cash
• increses the volume of cash outflows, and impacts on working capital.

debt factoring- 

• selling invoices to a third party
• debtor now owes money to the factor agnecy that will persue payment
• short term funding option
• imacts negatively on profit margins

mortgages-

• a loan secured against a property.
• business wil own the property when last payment has been paid
• long term source of finance
• business has immediate use of the property
• payments spread over time
• if paymets are missed the property may be repossessed 
• business needs to budget for the continuing maintainence of the property

venture capital

• funds from a professional investor in return for a share of ownership of the business
• investor will offer guidance and support and may have good contacts
• want to be involved in decsions making, loss of managments control
• expect quick returns
• long term investment

crowd funding

• raising funds online by asking people to invest a small amount 
• rewards are offered or the investment is in effect an advance order for the product or service at a discounted price
• short term source of fiance
• funds not always raised

loans 

• money borrowed at an agreed rate of interest
• medium to long source of finance
• repaymets spread over a period of time allowing business to budegt
• interest payments can be high and leander smay want security on the loan
• fixed interest loans- 
• vairable interest loans- the rate of interest changes over time.
• loans increses the volume of cash outflows and imacts the working capital 

leasing

• allows business to obtain assets without paying large lump sum
• arragend through finance company
• set replayments made but can be expensive 
• medium to short term source of finance
• have modern equipment 
• asset never belongs to business
• loans increses the volume of cash outflows and imacts the working capital 

invoice discounting

• organistaion lends against the value of the outstanding invoives at a fee
• short term source of finance
• business is still managing the relationship with cutomer
• loss of profit

peer to peer lending 

• small investors use an organistaion to invest
• organisation takes a fee for matching investors 
• long term source of finance
• useful for businesses that cannot secure finance from traditional sources
• interest payment may be high 

donantions

• good for non-profit
• difficult to plan 
• affceted by the state of the economy and bad publicity 

grants

• payed to a business by the government
• given under conditions
• do not have to be payed back
• grants not always avalible

trade credit

• has use of goods immediatly by pays supplier 30-90 days later
• short term source of finance
• sell on goods before they are paid for
• good for cash flow and no interest paid
• will need to be payed on time

cash sales- goods and services paid for at the time of sales using cash or card

credit sales- goods and services paid for the following purchases eg credit card

loans- money borrowed by the business from an external source

capital introduced- funds invested in the bsuiness by the owner or shareholders

sale of assets- money recieved from selling an asset 

bank interest recieved- business may store money in a savings account on which the bank will pay interest

cash purcahes- what a business buys

credit purchases-what a business buys

rent- regular payments made, business must have cash to cover these 

rates 

salaries- regular payments made, business must have cash to cover these 

wages- regular payments made, business must have cash to cover these 

utilities- regular payments made, business must have cash to cover these 

purchases of assets- small and large expenditure on items

value added tax- charged on goods and services 

bank interest paid

enables a business to plan, monitor and control spending effectively

• help business predict when they might have cash flow problems
• fail to consider delaid paymets

way to improve cash flow:

• reduce unnecessary expenses
• sells debt to debt factor agency
• ecourage supplier to offer extended credit
• request extention on overdrafe
• sell and lease assets back
• set targets to avoid cash flow issues
• encourage debtors to pay quicker

fixed costs- these are incurred by the business regardless of how well it is doing eg rates

variable costs- these increase when the bsuiness increases activity or output. eg raw materials

semi variable costs- these are a combination of fixed costs and costs which become variable once a certain level of activity has been reached eg, phone line rental 

TOTAL VARIABLE COSTS=

VARIABLE COSTS PER UNIT X QUANTITY 

TOTAL COSTS=

 FIXED COSTS + VARIABLE COSTS + SEMI VARIABLE COSTS

selling price per unit- amount paid by each customers for each item bought

sales in units- quantity of sales eg number of items sold

sales in value- monetary value of sales 

SELLING PRICE X THE NUMBER OF UINTS SOLD 

TOTAL SALES = NUMBER OF UNITS SOLD OR VALUE OF UNITS SOLD 

TOTAL REVENUE=

QUANTITY OF GOODS X SELLING PRICE PER UNIT

BREAK EVEN POINT 

TOTAL REVENUE = TOTAL COSTS 

contribution per unit = selling price - variable costs per unit

total contribution = contribution per unit x number of units

break even point = fixed costs/contribution per unit

margin of safety = sales - break even level of output 

months to breakeven = breakeven units/units produced per month

assets are equal to liabilities

total assets are equal to the fixed and current sales

liabilities are equal to the share capital, borrowings, other creditors and reserves

non current assets:

• can be tangible or untangibl
• they can depreciate (tangible)
• they can be depriciated (intangible)

current assets and liabilities- those intended to be converted into cash and current liabilities those short term debts: current assets

• inventories
• trade payables
• prepayments
• money as cash in the bank 

current liabilities

• bank overdraft
• tarse payables
• accruals

net current assets and liabilities: subtract current liabilities from the current assets

net assets is the same as net worth=

current assets + fixed assets - current liabilities 

stright line depreciation = 

assets-estimated salvage value/estimated useful life of asset 

gross profit margin =

gross profit/revenue x 100

mark up =

gross profit/cost of sales x 100

NET PROFIT MARGIN=

NET PROFIT/ REVENUE X 100

ROCE=

NET PROFIT BEFORE INTEREST AND TAX/ CAPITAL EMPLOYED X 100

CURRENT RATIO =

CURRENT ASSETS/CURRENT LIABILITIES

LIQUID CAPITAL RATIO =

(CURRENT ASSETS-INVENTORY/ CURRENT LIABILITIES

trade recieveable days=

trade recieveable/ credit sales x 365

trade payable days=

trade payables/ credit purchases x 365

inventory turnover=

average inventory/cost of sales x 365