Business Accounting: Chapter 1 - The Background and The Main Features of Financial Accounting
Business Accounting: Chapter 1 - The Background and The Main Features of Financial Accounting
Business Accounting
Chapter 1 - The background and the main features of financial
accounting
- Memorandum
- Journal
- Ledger
- Single entry
- Double entry
- Financial accounting =
(i) recordings business transactions, (ii) preparing financial statements, (iii) reporting
on financial positions
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Assets = Capital + Liabilities (Assets can be provided by the owner, i.e. capital, or by
third parties, i.e. in form of liabilities). Thus, Equity = Assets - Liabilities
Assets = all property of the business (physical and intangible, e.g. stocks)
Other assets = receivable and money on the bank
Equity = Capital (Profits + Investments) - Liabilities
Equity and Liabilities are sources of funds
Assets are application of funds
Statement of financial position aka. balance sheet, where equity is always equal
capital - liabilities Accounting equation record
Accounts payable - what is still owed to the creditor
Accounts payable - what is still owed to business by a debt
Current - can be liquidated within a year, e.g. inventory, accounts receivable
non-current assets - more than a year, e.g. buildings,fixtures, machinery
Non-current liabilities - debts that have to be paid within a year, e.g. accounts payable,
goods sold
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Historical cost concept - using historical data to arrive at a relatively well founded
assumption/guess/estimate
One statement to ensure objectivity - assumptions and calculations are in general
acceptable
Accounting standards/principles - rules to ensure consistency in reporting / accounting
Statements of Standard Accounting Practice - (SSAPs) & Financial Accounting
Standards - (FAS) by Accounting Standard Board (ASB)
money measurement concept - accounting does not show how business actually is
performing (processes, human resources, market conditions etc.)
business entity concept - only business activities, i.e. transactions are recorded.
time interval concept - financial statements are done annually, some times in-between
called interim statements.
Materiality - record materials in accordance to size vs company size (not every single
items listed individually)
Prudence - avoidance of understatement of liabilities and expenses, vice versa,
overstatement of assets and incomes.
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Lecture 1
Accountability - effect on the community (postive & negative) - ethical, environmental,
financial (tax)
Single entry - list of things
Growth of economy & business - town economies - more information - double-entry
accounting
Financial accounting vs. management accounting
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Economic entity business activities ->: measurements -s> processing -> communicate -> make decisions
Stakeholders: Internal vs External
owners, managers, employees, lenders, suppliers, customers, peers , analysts,
governments agencies.
Types of Business Ownership
Sole proprietorship
LLMC ? - limited liability m company
Partnership - joint equally liable
Limited owner liability - set to a limit of liability which is equal to the share of the company
LLP - limited liability partners
Regulatory Framework
GAAP - generally accepted accounting practice
IASB - International accounting standard board - international gap
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Conceptual Framework
Revaluation
Income & financial statement - accruals / matching concept - income and expenses need
to be recorded as they accrue - acc payable are seen as expenses, acc receivable are
seen as income.
Consistency - depreciation is set once on elaborated formula and doesn't change over
time recorded for each single item.
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Lecture 2
Source Documents
Journals
Ledger (T-Accounts)
Trial Balance
Financial Statement
AS at?
Balance Sheet - end of the period - accrual basis (when they take place)
Income Statement - during the period - accrual basis (when they take place)
Income - Expenses = Profit (Inflow and Outflow) (Matching principle)
Revenue - COS + Other Income - Other expenses (e.g. taxes) = Net Profit
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Add Profit/Loss
deduct dividends
Alter profit - to reduce taxes - start with target profit and work backwards
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Statement of profit or loss - debit & credit (not detail for each account, but just
outcome of t-account)
Sales - COGS=Gross Profit -Other expenses/+other income = Net Profit
Trading Account- detail on the statement of profit or loss - needed to calculate gross
profit.
Purpose
1. gross profit should be adequate to meet indirect expenses.
2. net sales can be determined
3. comparing net sales figures over time (increase not equal success as prices
could have gone up and not sales volume)
4. gross profit radio (increase or decrease showcase performance) = gross profit /
revenue
5. direct expenses to gross profit ratio - controlling expenses
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6. inventory turnover ratio Trial balance - test correctness & try to have equal credits to debts - done before
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3. Balance Sheet
Balance sheet is a list of the accounts having debit balance or credit
balance in the ledger (not double entry!) - two sides - left assets, right
liabilities 4. Profit or Loss Statement (includes Trading Account) (Net Profit or Net
Loss?)
Starts with gross profit, thus result from trading account. Calculating Net
Profit = Gross Profit - indirect expenses & income
Business is making a loss or (net) profit?
5. Trading Account (Gross Profit or Gross Loss?)
Detail on the statement of profit or loss - needed to calculate gross profit
6. Statement of financial position
List of balances arranged according to assets, capital or liabilities
Assets
Current - <1 year (Inventory, accounts receivable, cash at bank, cash at hand)
Non-Current > 1 year(land & buildings, fixtures & fittings, machinery, motor
vehicles)
Liabilities
Current have to be paid within < 1 year
Non-Current have to be paid > 1 year
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Sales (account) - return inwards (- cost of goods sold)= actual sales / goods sold
Purchase (account) - return outwards (- closing inventory) = actual goods bought
Carriage - expenses that occur with inward and outward returns (i.e. posting, packaging
etc.) ->
Inward carriage - included in trading account (gross profit)
Outward carriage - included in profit and loss statement (net profit)
The ending inventory for one period is always brought forward as the opening
inventory for the next period.
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Increase in assets and expenses are entered on the debit side (using assets to generate
revenue)
Drawings - money taken out of the company by the owner - NEVER EXPENSES cash (asset) is decreasing, thus credited
drawings is decreasing, thus debited
To check wherever the debit side matches the credit side (always equal) a trial balance
is created.
Listing all accounts and entering the totals of debits and credits.
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In a T-Account all transactions are listed and the end debit and credited are put
against each other to see wherever the account is debited, credited or equal (in
that case the account can be closed?)
Closing inventory
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