1- Intoduction to Accounting Flashcards
Define Financial Reporting
Way of recording/analysing/summarising transactions of a business.
Financial Accounting
- historic information
- principal function for to satisfy stakeholders needs
- report on financial performance/position
Management Accounting
- historic/current/predicted data
- for managers at company
- help plan budgets, plans, cash flows
Statement of Profit or Loss
- income generated
- expenditure incurred
- over a given period
- annual published statement
Form of Statement of Profit or Loss
Trading Account
- Sales - Cost of Sales = Gross Profit
Other Income
Expenses - indirect costs, running business
Revenue
income generated by operations of business for a period of time
-also sales
Expenses- simple definition
Costs of running business for a period of time
Income
- Increase in asset/decrease in liability
- result in increase in equity
- not include contributions from holders of equity claim
Expenses- complex definition
- decrease in asset/increase in liability
- result in decrease in equity
- not include distributions to holders of equity
Statement of Financial Position
List of all
- Assets owned
- Liabilities Owed
as at a particular date
Asset
present economic resource controlled by entity as result of past events
Asset examples
- factories
- office buildings
- lorries
- plant and machinery
- computer equipment
- cash
- goods held awaiting sale
Liabilities
present obligation of the entity to transfer economic resource as a result of past events
- debts of business
Liabilities examples
- amounts owed to suppliers
- owed to bank
- bank overdraft
- amounts owed to tax authorities
Capital
amount invested in business by owner that business owes back
- special kind of liability
Equity
In Limited Company capital takes form of shares
Residual Interest in assets of the entity after deducting all liabilities
Form of Statement of Financial Position
- As at one date
- Assets - current/non-current
Current Assets in order of liquidity - Capital
- Liabilities - current/non-current
Assets vs Liabilities must balance
Assets - Liabilities =
Capital/ Net Assets
What financial info would Investors be interested in?
- risk
- profitability
- dividends
- future prospects
What financial info would Employees be interested in?
- long term growth
- job security
- pay rise
- bonus
pension benefit
What financial info would Lenders be interested in?
- will they be repaid?
- future prospects
What financial info would Suppliers be interested in?
- payments on time
- paid at all
- credit terms and how to set
What financial info would Customers be interested in?
- can company continue to supply
- value for money
What financial info would Government + Agencies be interested in?
- statistics
- size of company/employees
- foreign trade
- corporation income tax
- sales tax
What financial info would The Public be interested in?
- environmental impact
- job opportunities
- products/services offered
Sole Trader
- owned/ run by one individual
- can employ people
- business/personal affairs identical for legal/tax purposes
Sole Trader Advantages (3)
- limited paperwork/cost to establish
- owner has complete control and entitled to profits/assets
- no reporting obligations
Sole Trader Disadvantages (4)
- owner liable for all debts (including all personal property)
- often reliance on overdrafts/savings for capital
- may have long working hours/less benefits
- death of owner could cease business
Partnership
- arrangement between individuals to carry out business in common view
- partnership agreement
- partners liable for debts
Limited Liability Partnership (LLP)
- partners not liable for debts
Partnership Advantages (6)
- no reporting obligations (unless LLP)
- more capital as more people
- increased skillset
- share of responsibility
- share of rick/loss
- no company tax, partners taxed personally
Partnership Disadvantages (5)
- jointly liable for debts
- partnership agreements set up costs
- illness/death of partner could cease
- slower decisions
- 1 partner leaves, partnership must be dissolved and re-set up
Limited Liability Company
- business debts and personal debts of shareholders legally separate
- formed under specific legislation
- owner is separate from directors
Limited Liability Company Legal Requirements on Accounts
- financial accounts to be submitted
- Larger companies accounts to be audited
- distribute accounts to shareholders
Limited Liability Company Legal Requirements to exist
- register with companies house
- memorandum of association deposited with registrar of companies
- at least one director
Limited Liability Company Advantages (6)
- no limit on shareholders
- investment less risky
- raising finance easier
- separate legal identity
- tax rate lower on companies
- shares transferred easily/ownership
Limited Liability Company Disadvantages (4)
- publish financial statements for all to see
- comply with legal/accounting regulations
- audits can be time consuming/expensive
- share issues regulated by law
Entities legally not-separate from owners
- Sole trader
- partnerships
Entities legally separate from owners
- LLP
- Limited Liability Company
Entities separate from Owners for Accounting
- All, called the separate entity concept
Entities not-separate from Owners for Accounting
None
Governance Definition
Those charged with governance of company are responsible for preparation of financial statements.
Generally the directors
Corporate Governance
system by which companies are directed/controlled.
Board of directors runs company on behalf of shareholders as owners of company can have a conflict of interest
Legal Responsibilities of Directors as per UK Companies Act 2006 (7)
- act within their powers
- promote success of the company
- exercise independent judgement
- exercise reasonable skill, care, diligence
- avoid conflict of interest
- not accept benefits from 3rd parties
- declare interest in any proposed transactions
What is a directors main aim?
Create wealth for shareholders
What 6 things must directors particularly consider?
- long term consequences
- employee interests
- good relations with suppliers/customers
- impact on local community/environment
- maintain business conduct/good reputation
- act fairly for all
Who are responsible for prep of financial statements?
Directors
What specifics do directors consider to prepare financial statements?
- in accordance with applicable financial reporting framework
- internal controls to ensure no error/fraud
- prevention/detection of fraud
What is Going Concern?
Directors must report on it in statements
- business will continue for foreseeable future
- no intention of liquidation
How does an audit for companies work?
- for larger companies
- annually against financial statements
- independent examination
- findings reported to shareholders
- helps to assess how well management carrying out stewardship
What can happen if there is bad corporate governance in company
- dominance of board by person/small group
- excessive perks/salaries of directors
- lack of transparency
- corruption
- repetitional damage
4 Main Concepts for all ledgers/statements to be prepared with
- Going Concern Concept
- Accruals/Matching Concept
- Prudence Concept /Worst case
- Consistency Concept
Accruals/Matching Concept
- revenue/costs must be recognised as earned/incurred
- not as cash is received/paid
- only cost of products sold included in period, remaining stock is assets
Prudence Concept
- worst case scenario
- include a degree of caution
- income/profit/assets not overstated, don’t anticipate before making a sale
- losses/liabilities not understated, recognises as soon as anticipated
Consistency Concept
- Judgement to be used
- accounting is not exact science
- similar items given same accounting treatment
- same treatment from one period to next
Offsetting Concept for Statement Preparation
- no offsetting
- all shown separately not as one figure
Materiality Concept for Statement Preparation
- if error is too trivial to affect understanding = immaterial
- material items = those with greater value than 5% profit
Duality Concept for Statement Preparation
every transaction has two effects
Substance over Form Concept for Statement Preparation
-transactions accounted for as per economic substance not legal form
- hire purchase, legally don’t own until final instalment but non-current asset as will own at some point
