Lecture 1 part1 Flashcards
Definition of accounting
Accounting is the process of identifying, measuring, and communicating financial information about an entity to enable users to make informed judgments and decisions based on the provided information.
What is the conceptual framework for accounting
A conceptual framework in accounting is a set of financial principles that help everyone understand and agree on how financial information should be recorded and reported. It’s a kind of rulebook that makes sure companies worldwide play by the same fair and understandable rules when telling their financial stories.
What is the most widely applicable conceptual framework
The most globally recognized conceptual framework is the Framework for the Preparation and Presentation of Financial Statements, issued by the International Accounting Standards Board (IASB).
Conceptual Framework Importance
A conceptual framework is crucial when developing practices for external reporting, like financial accounting. This ensures clarity and consistency in communicating financial information to those not involved in the daily operations of the business, fostering transparency and informed decision-making.
Internal Reporting Significance
For those managing daily business operations, special techniques have been developed. This practice, know as internal reporting or management accounting, focuses on providing information tailored for effective day-to-day management decisions, offering insights for strategic planning and operational improvements.
Sole Trader Business Basics
Formation: An individual may initiate a business independently, involving the sale of goods or provision of services.
Capital Source: If initial cash is lacking, the sole trader might opt for bank borrowing to kickstart the business.
Personal Connection: A sole trader’s business is often closely linked with their personal life.
Accounting Perspective: For accounting purposes, the business is treated as a seprate economic entity. The sole trader, as the owner, bears the risks during challenging periods and enjoys the benifits during good times.
users of accounting inormation- sole trader
The owner may hardly feel any great need for accounting information because he or she knows the business very well, but accounting information will be needed by:
•Government (HM Revenue and Customs) for tax collecting purposes.
•The bank for the purposes of lending money to the business
or
•A person intending to buy the business when the existing owner retires.
sole trader to partnerships
Expansion: A sole trader might team up, forming a partnership for added skills or resources.
Risk Reminder: While collaboration can turn ideas into profits, there’s financial risk, with one partner potentially shouldering all obligations if the other lacks sufficient assets. This legal setup is known as joint and several liability.
Accounting View: Accounting-wise, the partnership is seen as a seprate economic entity, owned by its partners.
needs of accounting information- partners
Partners seek accounting info to ensure a fair cut of the profits.
The Inland Revenue (HM Revenue and Customs) needs accounting data for tax matters.
Banks who provide finance.
Potential partners may want to review accounting information before joining.
Major Risk Reminder:
Property at Risk: Both sole traders and partnerships face the major risk of losing personal assets, including the family home, if the business faces failure.
Limited Liability Partnerships (LLPs)
Legal Basis: Governed by the Limited Liability Partnerships Act 2000.
Member Limit: No restrictions on the number of members.
Minimum Capital: A minimum capital requirement of £2.
Disclosure Similarity: Disclosure requirements resemble those of a company.
Financial Info Obligation: LLPs must furnish financial information equivalent to that of companies.
Private Limited Company (Ltd)
Title Identification: Contains ‘Limited’ or ‘Ltd’ in its title.
Public Share Offer: Prohibited by law from offering shares to the public, making it suitable for family-controlled businesses.
Public Limited Company (plc)
Public Share Offer: Permitted to offer shares to the public, but subject to more strict regulations in exchange for this option.
USERS AND THEIR INFORMATION NEEDs- management
Business Operations: Focuses on day-to-day business operations and using assets to generate profit.
Temporal Focus: Requires information on both past and future performance and position.
Reporting Frequency: Needs regular updates, typically on a monthly basis.
USERS AND THEIR INFORMATION NEEDS- employees
Ability to pay wages and continuity of employment.
•Issues associated with the working environment.
USERS AND THEIR INFORMATION NEED- lenders
Assess the economic stability and company vulnerability.
Interested in financial health and capacity to meet financial obligations.
