Topic 1 - Intro Flashcards
Main purpose of accounting
Communication of information for decision-making.
Two types of accounting
Financial - preparation of reports for external stakeholders.
Management - preparation of reports for internal management.
Statement of Profit or Loss (SOPL) info + shorthand name
“Income statement”
Over a year
Revenue from operating
Expenses from operating
Profit or loss
Other income or expenses
(Most include comprehensive income)
Statement of Financial Position (SOFP) info + shorthand name
“Balance Sheet”
At one point in time
Assets
Liabilities
Capital
Revenue
Income earned in the period from operating
Income from e.g. interest is “other income”
Expenses
Yearly running costs, used up in period reported
Profit or Loss
Total income made in period less total expenses incurred in period
Assets
Items of value owned by the business e.g. stock, vehicles, receivables, money in bank
Current assets - to be turned to cash (or consumed/sold) within 1 year (inc. cash)
Non-current assets - all other assets (use/keep for over 1 year
Liabilities
Obligations to transfer resources to a third party e.g. loan, trade payables
Current liabilities - due to be settled within 1 year/incurred as part of operating
Non-current liabilities - payables in periods over 1 year
Equity
Residual interest in assets after deducting liabilities
Primary users
Investors - future trends
Investment analysts - “
Lenders - will business repay
Creditors - “
Other users
Customers - prices/not closing
Competitors
Employees - salaries
Government - tax
Community reps (meh)
Regulation frameworks and standards
IASB (International Accounting Standards Board) - sets standards + made conceptual framework
IFRS (International Financial Reporting Standards) created by IASB - compulsory to follow in UK, used globally
Conceptual Framework
Describes the objective of and concepts for financial statements
Helps preparers make consistent policies
Helps all parties understand standards
Going concern concept
The business will continue operating into the future
Assets will be valued (and in SOFP) at appropriate vale (e.g. historic cost or fair value) NOT SCRAP.
Reason business won’t continue - assets valued at Net Realisable Value (value on sale)
Accruals concept
Allocate expenses + income to the period they relate to
Account for revenue when earned not when cash received
Account for purchases when received not when paid for
Matching concept/principle
When measuring profit, costs should be set against the revenue they generate at the point in time this arises
Prudence concept
No profits included that aren’t earned
Expenses are complete and not understated
Materiality concept
Only material items should be presented in financial statements
Only apply accounting standards to material items
Recognition + criteria for it
Items recognised in SOFP/SOI if:
item meets definition of an element
item meets criteria for recognition
criteria: transaction recognised if it provides relevant information about the element, and the element can be faithfully represented
Elements (5)
Assets
Liabilities
Ownership interest (Equity)
Income
Expenses
Measurement methods (2)
Historical cost
Current value
Historical cost (concept (CF))
Reflects the actual cost price billed of revenue charged for items
Current value (market value (CF))
Fair value - the price received/paid
Value in use for assets based on present cash flow values
Current cost - cost of equivalent assets + transaction cost
Principal qualitative characteristics of financial info
Relevance (influence decision-making)
- predictive or confirmatory value (or both)
Faithful representation
- complete, neutral, free from error
Enhancing qualitative characteristics of financial info
Comparability - users can see similarities + differences
Verifiability - direct and indirect (counting cash + checking inputs to model)
Timeliness - information is provided in sufficient time for decision making
Understandability - presented clearly + concisely
