Introduction to Financial Reporting PDF

# Introduction to Financial Reporting ## Chapter Learning Objectives Upon completion of this chapter you will be able to: - define financial reporting - identify and define types of business entity - identify users of the financial statements and their information needs - identify the purpose of...

# Introduction to Financial Reporting ## Chapter Learning Objectives Upon completion of this chapter you will be able to: - define financial reporting - identify and define types of business entity - identify users of the financial statements and their information needs - identify the purpose of the main financial statements - define the elements of the financial statements - define and explain accounting concepts and characteristics. ## 1 Overview of Accounting ### Accounting of Two Elements: - Recording - Summarising ## Management Accounts ## Financial Statements - Statement of Cash Flows - Statement of Changes in Equity - Statement of Profit or Loss - Statement of Financial Position ## Notes ## Introduction Much of the content of this chapter is likely to be new to you. However, it forms an important foundation for your current ACCA FA studies and other exams as you progress though the ACCA qualification, particularly Financial Reporting and Strategic Business Reporting. The financial accounting and reporting system of an entity records and summarizes the financial performance and position of a business. This information is crucial to the various stakeholders of an entity who will analyse that information to make significant economic decisions. It is of vital importance that these stakeholders have good quality information to be able to make informed decisions. Although the focus of the ACCA Financial Accounting syllabus is directed towards commercial business entities, the syllabus content can be applied to non-commercial entities such as charities, along with public and governmental organisations. This chapter explores the nature of business entities and their stakeholders and identifies what their information requirements are and how this fits into the process of financial reporting. ## Financial Accounting and Management Accounting ### Financial Accounting Financial accounting is initially concerned with the recording, classification and summarisation of individual transactions. From this information, annual financial statements are produced for external stakeholders such as providers of finance and potential investors. These financial statements are a report on the directors' stewardship of the funds entrusted to them by the shareholders. Investors need to be able to choose which companies to invest in and to evaluate their investments. In order to facilitate evaluation and comparison, financial accounts are prepared using accepted accounting conventions and standards. International Accounting Standards (IAS® Standards) and International Financial Reporting Standards (IFRS® Standards) help to reduce the differences in the way that companies draw up their financial statements in different countries. The financial statements of limited companies are public documents. although they do not reveal details about, for example, the profitability of individual products or services sold by a company. ### Management Accounting Management require much more detailed and up-to-date information in order to control the entity and plan for the future. Management needs to be able to cost-out products and production methods, assess profitability and so on. In order to facilitate this, management accounts present information in any way that may be useful to management, for example by operating unit or product line. Management accounting is an integral part of management activity concerned with identifying, presenting and interpreting information used for: - formulating strategy - planning and controlling activities - decision making, and - optimizing the use of resources ## 2 Users of Financial Statements The main users (stakeholders) of financial statements are commonly grouped as follows: ### Investors and Potential Investors Investors and potential investors are interested in the profit and returns they may receive along with the security of their investment. Future profits may be estimated from the target entity's past performance as shown in the statement of profit or loss. The security of their investment will be indicated by the financial strength and solvency of the entity as shown in the statement of financial position. The largest and most sophisticated groups of investors are the institutional investors, such as pension funds and unit trusts. ### Employees and Trade Union Representatives Employees and trade union representatives need to know if an employer can offer secure employment and possibly also pay rises. They will also have a keen interest in the salaries and benefits enjoyed by senior management. Information regarding divisional profitability will also be useful a part of the entity is threatened with closure. ### Lenders Lenders need to know if they will be repaid. This will depend on the solvency of the entity, which should be revealed by the statement of financial position. Long-term loans may also be backed by 'security' given by the entity over specific assets. The value of these assets will be indicated in the statement of financial position. ### Government Agencies Government agencies need to know how the economy is performing in order to plan financial and industrial policies. The tax authorities also use financial statements as a basis for assessing the amount of tax payable by an entity. ### Suppliers Suppliers need to know if they will be paid. New suppliers may also require reassurance about the financial health of an entity before agreeing to supply it with goods or services. ### Customers Customers need to know that an entity can continue to supply them into the future. This is particularly true if a customer is dependent on an entity for specialist supplies. ### The Public The public may wish to assess the effect of the entity on the economy, local environment and local community. Entities may contribute to their local economy and community through providing employment and patronising local suppliers. Some entities also run corporate responsibility programmes through which they support the environment, economy and community by, for example, supporting recycling schemes. ### Management and Competitors Management and competitors would also use the financial statements of an entity to make economic decisions. Management, however, predominantly use management accounting information as their main source of financial information for decision-making. Competitors may also access publicly available information to assist decision-making in relation to their own business activities. Overall, users of financial statements need information which is relevant and reliable to help them to assess management's stewardship of the resources which they control and manage. Financial information enables users to hold managers to account for their decisions and to enable users to make decisions about whether to invest in or provide additional resources to a business. ## Test Your Understanding 1 Which of the following users do you think require the most detailed financial information to be made available to them? - Management of an entity - Competitors - Trade unions - Investors ## 3 Types of Business Entity A business can be operated in one of several ways: ### Sole Trader This is the simplest form of business entity where a business is owned and operated by one individual, although it may employ any number of people. With this form of entity, there is no legal distinction between the owner and the business. To this end the owner receives all of the profits of the business but has unlimited liability for all the losses and debts of the business. ### Partnership Similar to a sole trader the owners of a partnership collectively receive all the profits and have unlimited liability for the losses and debts of the business. The key distinction is that there are at least two owners. The joint owners, or partners, are jointly and severally liable for the losses the business makes (i.e. they are each fully liable in respect of all business liabilities). ### Limited Liability Companies Unlike sole traders and partnerships, a limited liability company is established as separate legal entity to their owners. This is achieved through the legal process of incorporation. The owners of the company (the shareholders) invest capital in the company in return for a shareholding that entitles them to a share of the residual assets of the company (i.e. what is left when the company is wound up or liquidated). The shareholders are not personally liable for the debts of the company and whilst they may lose their investment if the company becomes insolvent they will not have to pay the outstanding debts of the company if such a circumstance arises. Likewise, the company is not affected by the insolvency (or death) of individual shareholders. Limited liability companies are managed by a board of directors who are elected by the shareholders. ## 4 The Framework One of the most important documents underpinning the preparation of financial statements is the Conceptual Framework for Financial Reporting 2010 (Conceptual Framework), prepared by the International Accounting Standards Board (IASB) (see Chapter 2 for a discussion of the regulatory bodies). The Conceptual Framework presents the main ideas, concepts and principles upon which all International Financial Reporting Standards (normally referred to as 'IFRS Accounting Standards'), and therefore financial statements, are based. It includes discussion of: - the purpose of the Conceptual Framework - the objectives of financial reporting - the qualitative characteristics of useful financial information - the definition, recognition and measurement of the elements from which the financial statements are constructed - the accruals and going concern concepts, and - the concepts of capital and capital maintenance (not in the syllabus). ## The Purpose of the Framework The purpose of the Conceptual Framework is to assist the IASB in the development of financial reporting standards and to assist preparers of financial statements to develop accounting policies when reporting standards do not provide sufficient guidance, or where there is a choice of accounting policy. It is also a useful reference document to assist in understanding, interpreting and applying accounting standards. ## The Objective of Financial Reporting The main objective is to provide financial information about the reporting entity to users of the financial statements that is useful in making decisions about providing economic resources to the entity, as well as other financial decisions. ## Prudence Prudence is an important concept (as referred to later in this chapter) and is the exercise of caution when making judgements under conditions of uncertainty. The helps to ensure that assets and income are not overstated in the financial statements, and that liabilities and expenses are not understated. ## 5 Qualitative Characteristics Qualitative characteristics are the attributes that make the information provided in financial statements useful to others. The Conceptual Framework splits qualitative characteristics into two categories: - **Fundamental qualitative characteristics** - Relevance - Faithful representation - **Enhancing qualitative characteristics** - Comparability - Verifiability - Timeliness - Understandability ### **Fundamental qualitative characteristics** **Relevance** - Information is relevant if - it has the ability to influence the economic decisions of users, and - is provided in time to influence those decisions. - **Materiality** has a direct impact on the relevance of information. **Qualities of relevance** Information provided by financial statements needs to be relevant. Information that is relevant has **predictive**, or **confirmatory**, value. - **Predictive value** enables users to evaluate or assess past, present or future events. - **Confirmatory value** helps users to confirm or correct past evaluations and assessments. - Where choices have to be made between mutually exclusive options, the option selected should be the one that results in the relevance of the information being maximised - in other words, the one that would be of most use in taking economic decisions. - **A threshold quality** is one that needs to be studied before considering the other qualities of that information: - a cut-off point - if any information does not pass the test of the threshold quality, it is not material and does not need to be considered further. - information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. **Faithful representation** If information is to represent faithfully the transactions and other events that it purports to represent, they must be accounted for and presented in accordance with their substance and economic reality and not merely their legal form. This is known as 'substance over form'. To be a perfectly faithful representation, financial information should possess the following characteristics: - **Completeness** To be understandable information must contain all the necessary descriptions and explanations. This may include estimated amounts where absolute precision is neither possible nor cost-effective to achieve. - **Neutrality** Information must be neutral, i.e. free from bias. Financial statements are not neutral if, by the selection or presentation of information, they influence the making of a decision or judgement in order to achieve a predetermined result or outcome. - **Free from error** Information must be free from error within the bounds of materiality. A material error or an omission can cause the financial statements to be false or misleading and thus unreliable and deficient in terms of their relevance. - **Free from material error** does not mean perfectly accurate in all respects. For example, where an estimate has been used the amount must be described clearly and accurately as being an estimate. ### **Enhancing qualitative characteristics** Comparability, verifiability, timeliness and understandability are qualitative characteristics that enhance the usefulness of information that is relevant and faithfully represented. - **Comparability** Users must be able to: - Compare the financial statements of an entity over time to identify trends in its financial performance and financial position; and - Compare the financial statements of different entities to evaluate their relative financial performance and financial position. For this to be the case there must be: - **consistency** and - **disclosure**. An important implication of comparability is that users are informed of the accounting policies employed in preparation of the financial statements, any changes in those policies and the effects of such changes. Compliance with accounting standards, including the disclosure of the accounting policies used by the entity, helps to achieve comparability. Because users wish to compare the financial position and the performance and changes in the financial position of an entity over time, it is important that the financial statements show corresponding information for the preceding periods. - **Verifiability** Verification can be **direct** or **indirect**. **Direct verification** means verifying an amount or other representation through direct observation, i.e. counting cash. **Indirect verification** means checking the inputs to a model, formula or other technique and recalculation of the outputs using the same methodology - **Timeliness** Timeliness means having information available to decision makers in time to be capable of influencing their decisions. Generally, the older the information is, the less useful it becomes. - **Understandability** Understandability depends on: - the way in which information is presented - the capabilities of users. It assumed that users: - have a reasonable knowledge of business and economic activities - are willing to study the information provided with reasonable diligence. For information to be understandable, users need to be able to perceive its significance. ## 6 The Elements of the Financial Statements In order to appropriately report the financial performance and position of a business the financial statements must summarise five key elements. The definitions are included in the Conceptual Framework and are as follows: 1. **Asset** - A present economic resource controlled by the entity as a result of past events (para 4.3). For example, a building that is owned and controlled by a business and that is being used to house its operations and generate revenues would be classified as an asset. 2. **Liability** - A present obligation of the entity to transfer an economic resource as a result of past events (para 4.26). For example, an unpaid tax obligation or a bank loan is a liability. 3. **Equity** - This is the 'residual interest' in the assets of the entity after deducting all liabilities. It is effectively what is returned to the owners (shareholders) when the business ceases to trade. 4. **Income** - This consists of the increases in assets or decreases in liabilities that result in increases in equity other than those relating to contributions from holders of equity claims. This can be achieved, for example, by generating revenue from sales or through the increase in the value of an asset. 5. **Expense** - This consists of the decreases in assets or increases in liabilities that result in decreases in equity, other than those relating to distributions to holders of equity claims. This can be achieved, for example, by purchasing goods or services from another entity or through the reduction in value of an asset. **Note:** **economic resource** A right that has the potential to produce economic benefits (para 4.4). It may be thought of as anything which a business makes use of in order to produce and supply goods and services to its customers. For example, a business makes use of plant and equipment, which could be purchased or hired, to help produce goods and services. ### **Categorisation of assets, liabilities and equity in the financial statements** There are some additional principles with regard to the classification of assets and liabilities that relate to the length of time they will be used in the business. #### Assets | Assets | Non-Current Assets | Current Assets | |---|---|---| | Any tangible or intangible asset acquired | Any tangible or intangible asset acquired | Assets expected to be: | | on a long-term basis to | on a long-term basis to be | realised, sold or consumed | | be used in providing | be used in providing | within the normal operating cycle, | | a service to the | a service to the business | or | | business. | . | realised within twelve months | | Not held for resale | Not held for resale in the | after the reporting period, | | in the normal course | normal course of trading. | or | | of trading. | Not expected to be realised | held primarily for trading | | Not expected to be | within twelve months after | e.g. | | realised within twelve | the reporting period. | Inventory, receivables, cash | | months after the | e.g. | | reporting period. | Land and buildings, motor | | | e.g. | vehicles, plant and machinery. | | | Land and buildings, | | | motor vehicles, plant and | | | machinery | | #### Liabilities | Liabilities | Non-Current Liabilities | Current Liabilities | |---|---|---| | Liabilities that: | Liabilities that: | Liabilities that are: | | have not been | have not been classified as current, or | expected to be settled | | classified as current, | payment can be deferred | within the normal operating cycle, | | or | unconditionally for more than | or | | payment can be | twelve months after the | held primarily for trading, or | | deferred unconditionally | reporting period. | is due to be settled within twelve months | | for more than twelve | e.g. | after the reporting period, or | | months after the | Loan | there is not an unconditional right to | | reporting period.| | defer settlement for at least twelve months | | e.g. | | after the reporting period. | Loan | | e.g. | | | | Payables, bank overdraft, loan (short-term) | ## Test Your Understanding 2 Classify the following items into current and non-current assets and liabilities: - Land and buildings - Receivables - Cash - Loan repayable in two years' time - Payables - Delivery van ## 7 The Components of a Set of Financial Statements A set of financial statements comprises: - **The statement of financial position** This statement summarizes the assets, liabilities and equity balances of the business at the end of a reporting period. The classification or grouping of assets, liabilities and equity in a consistent manner helps users of financial statements to understand that information and enable identification of information that is of particular relevance to them. Consistent presentation of information also helps users to make comparison and undertake analysis of financial information. A specimen statement of financial position, including hypothetical monetary amounts, is presented below. ### Statement of Financial Position at 30 June 20X7 | Non-Current Assets | $ | Current Assets | $ | |---|---|---| | Land and Buildings | 60,000 | Inventories | 11,000 | | Plant and Equipment | 27,500 | Trade Receivables | 10,700 | | | | Cash at bank and in hand | 1,500 | | | | **Total Current Assets** | **23,200** | |**Total Non-Current Assets** | **87,500** | **Total Assets** | **110,700** | ### Equity and Liabilities | Equity | $ | Non-Current Liabilities | $ | |---|---|---| | Equity share capital @ $1 shares | 40,000 | 6% bank loan (20X9) | 10,000 | | Share premium | 2,000 | | | | Revaluation surplus | 5,000 | | | | Retained earnings | 43,650 | | | | **Total Equity at 30 June 20X7** | **90,650** | | | | | | **Total Non-Current Liabilities** | **10,000** | | Current Liabilities | $ | |---|---| | Trade payables | 5,000 | | Bank overdraft | 4,150 | | Income tax liability | 600 | | Interest accrual | 300 | | **Total Current Liabilities** | **10,050** | | **Total Liabilities** | **10,050** | | **Total Equity and Liabilities** | **110,700** | Note that there is a standard format to the statement of financial position. Assets and liabilities have each been classified into either 'non-current' or 'current' items. Current assets are those which are expected to be converted into cash within twelve months of the reporting date. Non-current assets are those which are used in the business over a number of years to generate sales revenues and profits. Non-current liabilities are those which will be settled more than twelve months from the reporting date. Current liabilities are those which will be settled within twelve months of the reporting date. The capital structure of a limited liability company will be explained in more detail in the chapter 'Capital structure and finance costs'. In the case of a sole trader, the items classified within the 'Equity' section of the statement would be replaced by a simple capital account. - **The statement of profit or loss and other comprehensive income** This statement summarises the revenues earned and expenses incurred by the business throughout the reporting period. This used to be referred to as a 'profit and loss account.' A specimen statement of profit or loss and other comprehensive income, including hypothetical monetary amounts, is presented below. ### Statement of Profit or Loss and Other Comprehensive Income for the year ended 30 June 20X7 | | $ | |---|---| | Sales Revenue | 120,000 | | Cost of Sales | (72,500) | | **Gross Profit** | **47,500** | | Distribution Costs | (10,700) | | Administrative and selling expenses | (15,650) | | **Operating profit** | **21,150** | | Finance costs | (600) | | **Profit before tax** | **20,550** | | Income Tax | (600) | | **Profit for the year** | **19,950** | | Other comprehensive income: | | | Revaluation surplus in the year | 2,000 | | **Total comprehensive income for the year** |**21,950** | Note that the statement classifies or groups expenses together based upon their function. Cost of sales, for example, may include the cost of raw materials to be converted into finished goods for sale. It may also include wages of employees directly involved in the conversion or production process. Distribution costs will include freight and delivery costs for finished goods, and may also include wages of employees involved in the distribution function. Administrative and selling costs will include the wages costs of those involved with that function, together with other related costs such as telephone and postage expenses. Items accounted for in arriving at the profit for the year are regarded as having been realised during the accounting period. In addition, for limited companies, there may be an additional section to the statement to recognise items of other comprehensive income. This will comprise unrealised gains and losses during the accounting period and are separately disclosed in order to arrive at total comprehensive income for the year. The most common example of other comprehensive income relevant to the ACCA FA syllabus is a revaluation surplus which arises when an entity decides to account for an increase in the value of its land and buildings. This will be explained in further detail as you progress through your ACCA FA studies. Both the profit for the year and any items of other comprehensive income are reflected in the statement of financial position and also the statement of changes in equity (see below) at the end of the accounting period. - **The statement of changes in equity** This statement summarises the movement in equity balances (share capital, share premium, revaluation surplus and retained earnings - all explained in greater detail later in the text) from the beginning to the end of the reporting period. It applies only to limited liability companies and would not be required for a sole trader or partnership. ### Statement of Changes in Equity for the year ended 30 June 20X7 | Equity | Share Capital | Share Premium | Revaluation Surplus | Retained Earnings | Total | |---|---|---|---|---|---| | Balance at 1 July 20X6 | $34,000 | $1,100 | $3,000 | $25,200 | $63,300 | | Profit for the year | | | | $19,950 | $19,950 | | Dividend paid in the year | | | | ($1,500) | ($1,500) | | Revaluation in the year | | | $2,000 | | $2,000 | | Issue of share capital | $6,000 | $900 | | | $6,900 | | **Balance at 30 June 20X7** | **$40,000** | **$2,000** | **$5,000** | **$43,650** | **$90,650** | - **The statement of cash flows** This statement summarises the cash paid and received throughout the reporting period. Normally, it would be relevant to limited liability companies only, rather than to sole traders and partnerships. It will be explained in the chapter 'Statement of cash flows'. - **The notes to the financial statements** The notes to the financial statements comprise a statement of accounting policies and any other disclosures required to enable to the shareholders and other users of the financial statements to make informed judgements about the business. The notes to the financial statements are usually more detailed and extensive for limited liability company financial statements. than for a sole trader or partnership. ## 8 Important Accounting Principles and Concepts There are a number of other accounting principles and concepts that underpin the preparation of financial statements. The most significant ones include: ### Materiality An item is regarded as material if its omission or misstatement is likely to change the perception or understanding of the users of that information - i.e. they may make inappropriate decisions based upon the misstated information. Note that this is a subjective assessment made by those who prepare the financial statements (usually company directors) and it requires them to consider the reliability of the financial statements for decision-making purposes by users, principally the shareholders. For example, consider if the bank balance of a large entity (such as a company listed on the stock exchange) was misstated by $1 in the statement of financial position. This may not be regarded as a material misstatement which would significantly distort the relevance and reliability of the financial statements. However, if the bank balance was misstated by $100,000, this is more likely to be regarded as a material misstatement as it significantly distorts the information presented in the financial statements. ### Aggregation of similar items Aggregation of similar items is permitted as this presents summarised information of items with similar characteristics in the financial statements. For example, the total amount due from trade receivables is disclosed rather than specific amounts due from each credit customer. ### Substance over form As noted earlier, if information is to be presented faithfully, the economic reality must be accounted for and not just the strict legal form. An example of substance over form that you will encounter later in the text is the accounting treatment of redeemable preference shares. Although in legal form they are shares, there is an obligation to repay the preference shareholders and so they are accounted for as liability. ### Going concern Financial statements are prepared on the assumption that the entity is a going concern, and will continue to operate for the foreseeable future (i.e. it has neither the need nor the intention to liquidate or significantly curtail its operations). The normal expectation is that, based upon current knowledge and understanding of the business, it is reasonable to assume that the business will continue to operate for the next twelve months. Note that there is no guarantee that this will always be the case as evidenced by business failures and insolvencies. ### The business entity This principle means that the financial accounting information presented in the financial statements relates only to the activities of the business and not to those of the owner. From an accounting perspective the business is treated as being separate from its owners. ### Accrual accounting This means that transactions are recorded when revenues are earned and when expenses are incurred. This pays no regard to the timing of any associated cash payment or receipt. For example, if a business enters into a contractual arrangement to sell goods to another entity the sale is recorded when the contractual duty has been satisfied. That is likely to be when the goods have been supplied and accepted by the customer. The payment may not be received for another month but in accounting terms the sale has taken place and should be recognised in the financial statements. ### Prudence Preparers of financial statements should exercise prudence when preparing financial statements. Assets and income should not be overstated whilst liabilities and expenses should not be understated. However, care must be exercised to ensure that there is not deliberate misstatement of assets, liabilities, income and expenses as that would introduce bias into the financial statements. Applying the principle of prudence helps to ensure that financial statements are fairly stated and can be relied upon by users. ### Consistency Consistency of accounting treatment and presentation relates not only from one accounting period to the next, but also within an accounting period, so that similar transactions are accounted for in the same way. Application of IFRS Accounting Standards also help to promote consistency of accounting treatment between entities as identical items are subject to the same accounting requirements. Users of the financial statements need to be able to compare the performance of an entity over a number of years and to be able to compare the financial performance and position of different entities. Therefore it is important that the presentation and classification of items in the financial statements is retained from one accounting period to the next, unless there is a change in circumstances or a requirement of a new IFRS Accounting Standard as this facilitates comparability of information in the financial statements. ### Offsetting Offsetting is netting-off transactions and balances, which results in recording or presenting only the net effect of those transactions and balances. This reduces the information available to users of financial information and is not permitted (subject to a few limited exceptions). The gross or full effect of transactions and balances should be recorded and presented in financial statements. For example, many entities have both cash in the bank and a bank loan. They are presented separately in the financial statements (one as an asset and the other as a liability), rather than just the net balance. Similarly, if an entity both sells to, and buys from, another entity on credit terms, it may have both a receivable (amount due to it) and a payable (amount due from it) outstanding at the accounting year end. The two amounts are presented separately in the financial statements, rather than simply the net amount due to or from the entity. ### Duality This principle recognises that every transaction has two effects and therefore must be recorded twice in the accounting records. It is the fundamental principle upon which double-entry bookkeeping is based and is covered in detail in the following chapters of this publication For example, if an entity uses a business debit card to purchase a laptop for use in the office, what is the dual effect? The entity now has new asset (a laptop) and a reduced bank balance Both effects, the dual effect, must be recorded in the accounting records. ### Historical cost and current value Historical cost is the original monetary value of a transaction at the date that transaction was entered into. For example, an entity may have purchased a factory thirty years ago at a historical cost of, say, $100,000. It bears no relation to the current value of the factory that may now have a current value significantly in excess of its original cost due to the cumulative effect of inflation and other economic factors. Similarly, the historical cost of an item of plant and equipment may be significantly more than its current value due to factors such as wear and tear from usage and changes in technology. ## Test Your Understanding 3 Which of the following statements are correct? - Only tangible assets (ie those with physical substance) are recognised in the financial statements. - Faithful representation means that the commercial effect of a transaction must always be shown in the financial statements even if this differs from legal form. - Application of the accruals principle means that, if an entity makes a profit, then it will not have a bank overdraft.. ## 9 Chapter Summary | Type of Business | Description | |---|---| | Sole Trader | Business owned and operated by one person | | Partnership | Business owned and operated by two or more people | | Company | Business owned by and operated by many people. | ### Account for transactions | **Accounting Type** | **Description** | |---|---| | **Financial Accounting** | Production of summary financial statements for external users. | | **Management Accounting** | Production of detailed accounts for internal use. | | **Financial Accounting** | **Management Accounting** | |---|---| | Users: | Users: | | - Investors | - Management | | - Employees | | | - Lenders | | | - Government | | | - Suppliers | | | - Customers | | | - The Public | | | **Financial Accounting** | **Management Accounting** | |---|---| | Main statements: | | | - Statement of cash flows | | | - Statement of changes in equity | | | - Statement of profit and loss | | | - Statement of financial position | | | - Notes | | | **Financial Accounting** | **Management Accounting** | |---|---| | Elements: | | | - Assets | | | - Liabilities | | | - Equity | | | - Income | | | - Expenses | | | **Financial Accounting** | **Management Accounting** | |---|---| | Qualitative Characteristics: | | | - Relevance | | | - Faithful representation | | | - Comparability | | | - Verifiability | | | - Timeliness | | | - Understandability | |