CIMA BA3: Nature and Objectives of Accounting

• Module 1 focuses on the nature and objectives of accounting within financial accounting.

The Basics

• It's recommended to bring the Module Guide to lectures and seminars.
• Use the CIMA BA3 textbook.
• Prepare for sessions in advance by reading and working through questions.
• Engage actively by asking questions.

Chapter Objectives

• Explain different types of business entities.
• Understand the need for accounting records.
• Define accounting.
• Explain the nature, principles, and scope of accounting.
• Explain the main elements of financial statements, including the statement of financial position and income statement.
• Understand the purpose of key statements.
• Explain the types of business.
• Explain who uses financial statements.

Types of Business

• Organizational structures differ based on their activities' nature and size.

Profit-Making Entities

• Sole traders, partnerships, and limited companies are types of profit-making entities.

Non-Profit Making Entities

• Clubs, societies, and charities exist as non-profit making entities.

Sole Trader (Profit Making)

• A sole trader is the simplest business form, owned and operated by one individual.
• There is no legal distinction between the owner and the business.
• The owner receives all profits but holds unlimited liability for losses and debts.
• The capital structure for a sole trader is simple

Partnership

• Similar to sole traders, partnership owners receive profits and have unlimited liability for business losses/debts.
• A key distinction is that there are at least two owners.
• Joint owners or partners are jointly and severally liable for business losses.
• The capital structure mirrors a sole trader's where each partner has a financial interest divided between capital and current accounts.
• The capital account typically holds a fixed amount, changing only when a partner joins or leaves.
• The current account reflects each partner’s share of profit or loss.

Partnership Continued

• Shareholders cannot make withdrawals or drawings as sole traders or partners do.
• Dividends are paid on their investment in the company
• Dividends are paid from accumulated profits

Limited Liability Companies

• Unlike sole traders and partnerships, these companies are separate legal entities from their owners.
• Shareholders invest capital and receive shareholding entitling them to residual assets if the company is liquidated.
• Shareholders are not personally liable for company debts; their loss is limited to their investment.
• Company insolvency or death of shareholders don't typically affect the company.

Financial Accounting Role

• Financial accounting measures transactions/events, records effects, and summarizes transactions and financial results as useful statements

Defining Accounting

• Accounting involves collecting, recording, summarizing, and communicating financial information about an organization
• This enables users to make informed judgments and decisions.

Double-Entry Bookkeeping

• The first part of the accounting definition is collecting and recording transactions and refers to double-entry bookkeeping.
• Double-entry bookkeeping maintains records of the value of an business' transactions.

Final Accounts and Statements

• The accounting defintion also relates to communicating results through final accounts where
• Statements prepared show profit earned in a period and the financial state at the end of that period.

Collecting and Recording Transactions

• Recording past data involves measurement and recognition, not always easy processes

Definition of Terms:

• Recognition incorporates/admits information into basic financial statements.
• Monetary value is determined through measurement.

Revenue Recognition Example

• A company sells assets with payment options: immediate or in 30 days; immediate payment yields a 10% cash discount.
• It must be decided when to record the revenue event and for what amount (measurement).

Revenue Recognition

• Revenue might be recognized: when the sale is made, when payment is received, or when an invoice is issued.

Business Transactions Examples

• Transactions includes paying wages to employees, buying equipment and goods, or selling goods/services.
• Rules dictate what is recorded and measured, sometimes needing subjective judgment.

Recording Transactions:

• A double entry bookkeeping system records transactions into a set of ledger accounts'. Data recorded needs to be accurate to assist management in making informed decisions.
• Recording data is bookkeeping

Reliability and Consistency

• Accounting rules, such as IASB's Framework and GAAP, ensure reliability and consistency

Communicating Through Financial Statements

• Financial statements are part of 'summarising and communicating'.
• Listed companies often provide financial statement links on websites.
• Limited company financial statements are public (filed at Companies House).
• Financial statements for sole traders are private but banks require them for loan applications.

Financial Statement Composition

• Final accounts comprise a profit and loss account
• This shows profit, loss, and financial performance
• Composes also a balance sheet which shows financial position at period's end.

Financial Information Users

• Investors/potential investors are interested in potential profits and investment security.
• Employees/unions need to know about job security and pay rises.
• Lenders determine if they will be repaid.
• Government agencies assess how the economy is performing
• Suppliers need payment assurance, especially new ones assessing financial health.
• Customers want to know if a company will continue to supply them, especially if specialized
• Management uses financial statements to make decisions.

Financial vs Management Accounting

• There are commonly two sets of accounting information.
• These are financial and management accounting.

Financial Accounting Details

• Financial accounting produces a summary of financial statements, intended for external users.
• Reports are generally annual
• Focus is external
• The reports contains historical information only such as in the statement of financial position, income statement, cash flow statement, and notes.
• Governed by rules, produced for shareholders or other owners.

Management Accounting Details

• Management accounting produces detailed accounts, used by management to control business and plan for the future.
• Reports produced monthly
• Focus is internal
• Management accounting reports both historical (results so far) and future information (budgets for the next periods).
• Management accounting has no prescribed format

Financial Statements

• The Income Statement and Statement of Financial Position are the two most important financial statements

Income Statement Summary

• The income statement summarizes an organization's performance as reflected in profitability, items revenues/expenses that led to profit or loss.
• It depicts events over a time period
• The formula to follow should be that Income = Revenue - Expenses

Income Statement: Income

• This recognizes inflow of economic benefits within an accounting period.
• Sales, rental income, discounts received from suppliers, and interest/commission incomes can be included.

Income Statement: Expenses and Expenditure

• Expenses recognize outflows of economic benefits during an accounting period.
• This decreases economic benefits during an accounting period.

Capital Expenditure

• Results in acquiring non-current assets or improving their earning capacity.
• Increases the value of assets.

Revenue Expenditure

• This maintains or trades of the business, including the current capacity for non current assets
• This Expenditure can be charged to the income statement

Statement of Financial Position (Balance Sheet)

• It Shows an entities financial position at a given date
• Includes, asset, liabilities and equity
• The Statement gives investors an idea of what the company owns and owes.
• Additionally it shows the invested amounts by shareholders
• Balance Sheets follow the formula: Assets = Liabilities + Shareholder's equity.

Assets

• 'a resource controlled by the entity from events from which future economic benefits are expected to flow'
• Assets include: property, machinery, equipment, motor vehicles, stock (inventory), amount owed by customer, cash at bank

Liabilities

• 'a present obligation of the entity from past events, in which settlement may result in an outflow from the entity

Asset Categories

• Non-Current Assets are held long-term to earn income, such as land, buildings, plant, machinery, furniture, equipment, and motor vehicles.
• Non-Current Assets values can be depreciated
• Current-Assets are held short term and can be turned into cash. -Current assets includes, cash/bank, inventory (stock),

Liabilities Categories

• Non-Current Liabilities are debts payable after one year
• Non-Current Liabilities includes repayable loans
• Current Liabilities are debts payable within one year,
• Current Liabilities include payables, bank overdrafts & Loans
• Capital (Equity)
• Capital is a special kind of liability between a business and its owners and would be due to them if business activities were terminated.

Order of Items in the SOFP

• Current/non-current assets and liabilities must be presented separately in order of approximate liquidity.

Explore the nature and objectives of accounting with CIMA BA3 Module 1. Understand business entities, accounting records, principles, and elements of financial statements. Learn about profit-making entities like sole traders and limited companies.