M01 Revision Questions

• Accounting records, categorizes, and summarizes financial transactions.
• Financial accounting reports historical financial data.
• Management accounting gives detailed financial analyses and future plans.

Definition of Accounting

• Aims to record, categorize, and summarize financial transactions like sales, purchases, and expense payments.
• Transactions go into ledger accounts then reported in the financial statements.

Financial Accounting

• Reports a business's financial performance and position.
• Primary goal is to meet the information needs of those outside of the business by providing historical information.

Management Accounting

• Supplies managers with the detailed information they need to control business resources and plan for the future with forecasts and budgets.
• This study guide focuses on financial accounting.

Generally Accepted Accounting Principles (GAAP)

• Rules govern the preparation of financial statements, including company law, accounting standards, and stock exchange rules.

Shaping Factors of Financial Accounting

• Include national legislation
• Accounting concepts
• Individual judgment
• Accounting standards both nationally and internationally
• Other international influences
• Generally accepted accounting principles (GAAP)
• Focus is on limited liability companies, due to close regulation.

National Legislation

• Requires limited liability companies to prepare and publish annual accounts, regulated by national legislation.

Accounting Standards

• Many nations use national or international accounting standards, , in addition to company law.
• This course uses International Financial Reporting Standards (IFRSs) to explain accounting treatments.

GAAP Details

• Encompasses all accounting rules in a country, derived from various sources, including national standards, legislation, and stock exchange mandates
• GAAP vary but often share similarities, especially in accounting standards like IFRSs.

Key Accounting Concepts Overview

• Accountants use key concepts when preparing accounts and financial statements.
• Going concern and accruals concepts are crucial.

Introduction to Key Concepts

• Accounting practices evolved over centuries and rely on established concepts used to build an accounting framework.

Discussion Concepts and Assumptions

• Fair presentation
• Consistency
• Materiality
• Business entity assumption
• Monetary unit assumption
• Time period assumption
• Cost principle
• Going concern
• Accruals

Qualities for Useful Financial Statements

• Relevance
• Faithful representation
• Comparability
• Verifiability
• Timeliness
• Understandability
• Relevance and faithful representation are known as the fundamental qualitative characteristics.

Fair Presentation

• Financial statements must present fairly the financial results of an entity.
• International accounting standards require fair presentation of financial performance and financial position.
• 'Fair presentation' is undefined, and its meaning changes with accounting and business practices.

Requirements for Fair Presentation

• Compliance with accounting standards
• Appropriate accounting policies
• Relevant, comparable, verifiable, timely, and understandable presentation
• Additional disclosures

Fair Presentation 'Override'

• In some areas managers can depart from international accounting standards if it results in a fairer overall presentation.

Consistency of Presentation

• Financial statement item presentation and classification should stay consistent from period to period, unless there's a big change in operations or a better presentation is needed or IFRS needs a change.

Materiality Concept

• Items are deemed material if their omission or misstatement could influence the economic decisions of users.
• An immaterial error is too trivial to affect understanding.
• Assessing materiality is subjective, and rules of thumb exist, such as defining as material items exceeding 5% of net profit.
• Sensitive items are regarded as particularly sensitive and even a very small misstatement of such an item would be seen as a material error.

Business (Economic) Entity Assumption

• Dictates that a business is separate from its owners, regardless of legal structure which means the financial statements are separate
• If an owner invests in the business, it's recorded as owed to the owner and if the owner spends business money, it's not a business purchase.

Monetary Unit (Money Measurement) Assumption

• Only deals with items capable of being expressed in monetary terms
• For example, a business cannot include the value of employee experience as an asset.

Time Period Assumption

• Statements should be prepared regularly, normally every year.

Cost Principle

• Financial statement items valued at cost, but several valuation bases exist.

Historical Cost

• Valued at the amount the business paid to acquire them, maximizing objectivity with documentary evidence to prove purchase or expense amount.

Definition of Historical Cost

• Cost of a transaction when it occurred.

Replacement Cost

• Replacement cost means the cost to replace with the same item.

Net Realisable Value

• The expected sale price, less any costs still getting it ready for sale and then selling it.

Economic Value

• Value that reflects an asset's ability to generate income.
• A machine's economic value is the profits it is expected to generate.

Conceptual Frameworks

• Documented assumptions, principles, and rules underpinning financial accounting and reporting.
• Based on the International Accounting Standards Board's (IASB) Conceptual Framework for Financial Reporting.
• Determines how financial statements are prepared and the information they contain the 'going concern' assumption is underlying.

Going Concern Definition

• Entity will continue in operation for the foreseeable future so it has neither the intention nor the need to liquidate or scale operations materially.
• Assumes business will operate approximately as is for at least 12 months without liquidation

Accruals Basis of Accounting

• Records revenue/expenses when earned/incurred
• It makes it clear that financial statements should match revenue earned with expenditure incurred in earning the revenue.

Qualitative Characteristics of Financial Information

• Attributes make information in statements useful, relevant and faithful representation
• Enhancing ones are comparability, verifiability, timeliness and understandability.

Relevance

• It needs to be relevant and useful

Faithful Representation

• Must faithfully represent what they purport to represent, be complete, neutral, and free from material error.

Substance Over Form

• It implies that transactions and other events are accounted for and presented in line with their true economic reality.

Comparability

• Users must be able to compare an entity's financial statements through time to identify trends and with other entities.

Verifiability

• Means different knowledgeable and independent observers could broadly agree that a particular way of presenting an item is a faithful representation.

Timeliness

• IF information is timely, it is available to users in time to influence their decisions.

Understandability

• Users must understand the information

Main Financial Statements Overview

• Principal statements are the statement of financial position, profit or loss, and changes in equity
• Key elements within these statements are assets, liabilities, equity (capital), revenue, and expenses.

Statement of Financial Position (Balance Sheet)

• It lists assets owned and liabilities owed at a specific date.
• It provides a snapshot of the financial position at a particular moment.

Assets

• Something of value the business owns or has the use of, like factories, equipment, cash, and inventory.

Non-Current Assets

• Acquired and kept in the business to earn profits, used over multiple accounting periods.

Current Assets

• Intended to be converted to cash within a year, like inventory and receivables.

Liabilities

• The accounting term for the debts of a business.
• Examples include amounts owed to suppliers, banks, and tax authorities.

Current Liabilities

• Debts due to be paid within one year

Non-Current Liabilities

• Debts not payable within the short term (one year).

Capital or Equity

• Amounts invested in a business by the owner
• In a limited liability company, capital is often in shares.
• Equity is the amount remaining after deducting liabilities from assets.

Form of Statement of Financial Position

• Lists assets first, then capital and liabilities; assets equal liabilities plus capital.

Statement of Profit or Loss

• Record of income and expenses over a period like a business has whether the business had more income than expenses.

Income and Expenses

• Income is the money or other economic benefits that flow into one, revenue is earned from customers.

Expenses

• The money or other economic benefits that flow out of a business during the accounting period, mostly running costs.

Form of the Statement of Profit or Loss

• The period depends on its purpose, but usually annual.

Statement of Changes in Equity

• Shows the changes from the owner of the business, the net profit or loss during the period, more capital, etc.

Form of the Statement of Changes in Equity

• Normally one finacial year.
• The statement of changes in equity is a link between the statement of profit or loss for a period and the financial position at the beginning and end of the period.

Users of Financial Statements Overview

• Various groups of individuals need accounting information.
• Key users include investors and lenders.

The Need for Financial Statements

• Businesses need to share finances so people can see

Users of Accounting Information

• Managers: need current financial insights to run the company day-to-day.
• Shareholders: owners assessing company and management performance.
• Trade contacts: suppliers and customers assessing company's financial stability.
• Providers of finance: banks ensuring repayment ability.
• Taxation authorities: assessing tax liabilities.
• Employees: want informations about their job and financial situation.
• Financial analysts and advisers: for client advice.
• Government: interested in the allocation of resources to provide base for national statistics and compliance of Accounting Standards to report.
• The public: Entities affect members of the public in a variety of ways.

Needs of Different Users

• Managers need special access to more insights relating to performance such as profitability.

Accounting Equation Overview

• The accounting equation expresses the equality between assets and liabilities.

Equation Transactions

• All business transactions are accounted for to show equity between assets and liabilities.
• Trade payables are liabilities, trade receivables are assets.

Definition of accounting ecuation

• Assets = Capital + Liabilities

Profit introduced into accounting equation

• Profit = earned revenue. Property to the owners to do with what they want. Retained and retained profits are allocated.

Accounting Equation

• Net Assets = Assets-Liabilities

Capital

• Accounts are with owner so capital

The drawing equations

• drawings are what someone has taken out, but has not been expensed

Trade Payables and Trade Receivables Definition

• It is liability if a business owes someone money
• The only paysable are sale tax

Trade receivable

• customer will get stuff, paying a trader
• This also means someone is a debtor

Types Of Business Overview

• Make up of a profit
• The main types are
• a sole trader,
• partnership
• limited liability company
• Also Retail and service entity

What Is A Business?

• A business is a commercial or industrial concern which exists to deal in the manufacture, re-sale or supply of goods and services.
• A business is an organisation which uses economic resources to create goods or services which customers will buy.
• A business is an organisation providing jobs for people.
• A business invests money in resources, for example, buildings, machinery, employees, in order to make even more money for its owners.

Definition : profit

• Profit is the excess of revenue (income) over expenditure.
• When expenditure exceeds revenue, the business is making a loss.

Retail and Service Entities

• two types retail and service

Definition retail

• one which buys in goods buys them as they are.

Definition service

• instead provides some sort of service to its customers.

Types of Business Form

• Sole Trader
• Partnership
• Limited LIability Companies

Definition sole traders

• work for themseleves e.g. plumber.

Definition Partnerships

• Shops that needs accountancy and things like that.

Definition liability Companies

• have a level of advantage.

Legal Differences

• Owners usually have separate entities, for law tradership has to be from the owne

Business Economic

• For accounting. All that shit has to be seperate.

Advantages Trading The limited liability

• In the world and for investment it is less riskey

disadvantages of Trading The limited liability

• they have to publicly make the statement anualy

The Trade Partnership

• Each partner needs to be viewed as a separate income thing.
• Should be divided sepererlty