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34 Cards in this Set

  • Front
  • Back

Purpose of Financial Accountancy


Primarily concerned with producing financial statements. It involves the following activites:


- Recording (business transactions as they occur)


- Classifying (transactions into meaningful groups)


- Summarising (groups of transactions into meaningful reports)


- Communicating (information to interested parties)

Users of Accounts

*Owners - Performance, profit level, amount that can be withdrawn


*Managers - day-to-day info to make operational decisions


*Clients/Customers - whether the business will continue to operate & goods services received on time


*Lenders - will interest and principal be repaid


*Suppliers - will it continue to operate and repay amounts owing


*Potential Investors - Profit levels and future returns forecast


*Competitors - info to secure strong position in industry


*Employees - job security, career development, wages / salaries


*Government agencies - Tax info, statistics, policies


*Public - environmental issues, local economy factors

Financial Accounting focus

- Financial info for external users


- Financial info that must be produced as required by law or regulation


- Historic information

Management Accounting focus

- Tailored reporting as required by decision makers


- Forecasting information e.g 3 year plan


- Financial info not required by law or regulation


Types of business entity

Sole trader an individual who both owns the business and carries out the work. Same legal entity


A limited liability company a business owned by shareholders who may have no direct involvement in running the business


Not-for-profit orgs an organisation whose purpose it is to operate in the interest of its members rather than generate a profit for owners

Accounting Concepts - Business Entity

Requires that a business and its owner are treated as separate entities. This means personal transactions are recorded separately from business transactions.

Accounting Concepts - Money Measurement

Financial info only takes into account those items that can be stated in monetary terms.

Accounting Concepts - Duality

Every transaction will impact twice on an organisation.

Accounting Concepts - Historical Cost

Transactions MUST be valued in a consistent manner. To ensure this, transactions are normally recorded at their original (or historical) cost. This means that market value may be significantly different to the value shown in the statement of financial position.

Accounting Concepts - Accounting Period

Financial statements are prepared on a regular basis, usually every 12 months.

Accounting Concepts - Going concern

We assume, unless told otherwise, that the organisation will continue to operate for the foreseeable future. If this were not the case the values shown in the statement of financial position might be very different

Accounting concepts - Consistency

Judgements used in the preparation of financial statements must be applied consistently from one accounting period to another. This allows comparability.

Accounting concepts - Accruals / matching

During an accounting period, income should be matched against the expenses incurred in generating it. This is regardless of whether all cash relating to these transactions has been paid / received. This ensures the profit reported reflects the true value of transactions that have taken place during the period.

Accounting concepts - Prudence

Prudence requires that judgements, such as those on depreciation or allowance for debts, are not over optimistic. It is required to recognise in full any potential losses that might arise but do not record anticipated profits until fully realised.

Accounting concepts - Separate determination

An organisation can not net off liabilities against assets. E.g, if a company has both a bank balance and an overdraft, they must be listed separately and not as a net figure.

Accounting concepts - Objectivity

An accountant should not include personal opinion or prejudice when preparing financial statements. They should be neutral and free from bias.

Accounting concepts - Realisation

Profits and revenue should only be included in financial statements when they are realised and all known expenses and losses should be provided for.



One exception is where property assets are revalued and held as unrealised gains in the statements.

Accounting Concepts - True and fair view

The financial statements are required to give a true and fair view, or present fairly in all material aspects. They should be materially correct and unbiased.

Accounting concepts - Substance over form

The legal form of a transaction may sometimes differ from the commercial substance. If this is the case, the financial statements should show the commercial substance of the transaction and its impact upon an organisation.

Accounting concepts - Materiality

Materiality is the threshold level above which the addition, omission or misstatement of an item would influence the decision of a user.

Accruals accounting vs cash accounting

Most of the time we apply the accruals concept, recognising income when it is earned and expenditure incurred regardless of cash movement



Cash account involves recording receipts and payments only. It is a lot easier to understand and apply but gives us much less useful information.

Elements of financial statements

Assets Things that an entity owns e.g cash, inventory, buildings


Liabilities Things that an entity owes e.g, debt, overdraft


Capital How the entity is financed e.g, shares, owner investment and profits


Income e.g Sales


Expenditure e.g salaries, rent

             

Capital expenditure

Capital expenditure results in the purchase of non-current assets


The cost of non-current assets is not charged to the income statement, only the depreciation is


Costs of improving the non-current asset is also categorised as capital expenditure


E.g replacing single glazing with double would add value and is therefore capital expenditure, whereas replacing a broken window is not and would go in the income statement.

Revenue expenditure

Revenue expenditure is expenditure incurred for the purpose of trade or to maintain non-current assets e.g salaries, rent, electricity

Income

Income may be classed as capital or revenue



Capital income is the proceeds from sale of non-current assets. The profits (or losses) are included in the income statement



Revenue income is income derived from the sale of trading assets such as inventory, the provision of services or interest and dividends received from investments held by the business.

The statement of financial position

Assets = Capital + Liabilities


or


Capital = Assets - Liabilities


or


Liabilities - Assets - Capital

Assets

There are two types of assets



Tangible (physical with real solid existence)



Intangible (no physical existence, e.g a patent)

Non-current vs Current Assets

Non-current


Expected to be of continuing use to the company. Expected to benefit more than one accounting period. They are capitalised and depreciated. Examples: Land , building, IT equipment, vehicles



Current


Consumed during one accounting period. Examples: Inventory, trade receivables, Prepayments, Short term investments, cash.

Non-current vs Current Liabilities

Non-current


Liabilities not due for repayment within the next accounting period. Examples: Long-term loans, mortgage, loan stocks



Current


Liabilities that are due for repayment within the next accounting period. Examples: Loans repayable within one year, bank overdraft, trade payables, taxation payable, accrued expenses

Capital and Drawings

Capital is the funding brought into the business by the owner.


Drawings are the amounts (in the form of cash or other assets) taken out of the business during the period.



Capital is as follows:



Capital at the beginning of the period


Add additional capital introduced during the period


Add/(Less) profit/(loss) earned during period (from income statement)


Less drawings


= Capital at end of period



Capital c/f = Capital b/f + New Capital + Profit - Loss - Drawings


Statement of Financial Position Pro Forma

The Income Statement

Revenue - Expenses = Profit / Loss

The Income Statement Pro Forma