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Fundamentals of Accounting and Finance 1 - Financial Accounting Lecture notes
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Lecture notes for Fundamentals of Accounting and Finance (Financial Accounting).
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Fundamentals of Accounting and Finance Lecture Notes02/11/2020 (Week 5)
Financial accounting is to do with the past
Entity - an organisation (e.g business)
Bookkeeping: recording transactions an entity may make
Accounting: arranging transactional data to create useful information
Recording: communicating this info to users
Info needs to be relevant/ helpful to users when making decisions
You must be Prudent; Under uncertainty, use caution:
● Do not anticipate profits until it is certain
● Recognise losses when foreseeable
● Do not overstate/understate values in Financial Statements
Materiality - a threshold where the misstatement of an item could impact the decisions of
users of the financial statement.
Depends on SIZE and NATURE
Research
● Prudence concept - an entity must not overestimate its revenues, assets and
profits, besides this it must not underestimate its liabilities, losses and expenses.
● Accrual accounting - measures a company's performance and position by
recognising economic events regardless of when cash transactions occur
● Consistency concept - once you adopt an accounting principle or method, continue
to follow it consistently in future accounting periods so that the results reported from
period to period are comparable
● Going concern - when a company is financially stable enough to meet its obligations
and continue its business for the foreseeable future
● Historical cost - the value of an asset on the balance sheet is recorded at its original
cost when acquired by the company
● Money measurement concept - a business should only record an accounting
transaction if it can be expressed in terms of money.
● Materiality - a threshold where the misstatement of an item could impact the
decisions of users of the financial statement.
● Separate entity concept - we should always separately record the transactions of a
business and its owners.
● Dual aspect concept - For every transaction, the accounting equation should
balance
,Introduction to Financial Statements
Financial Statements summarise
● Performance of a period of time (e.g annually)
● Position (Net worth of entity: things it owns and owes, not market value)
Elements of Financial Statements
● Assets - a resource controlled by an entity as a result of a past event from which
future economic benefits are expected to flow to that entity (i.e something of value
that can be used to generate profits) Examples: buildings, lorries, food for
supermarkets
● Liability - obligation for an entity that will be settled in the future through an outflow
of economic benefits. Examples: wages to staff, paying compensation, debt
● Income - Makes an asset go up or a liability go down (e.g sales, rent received, value
of building/ asset increasing).
● Expenses - “the cost of running an entity” makes an asset go down or a liability go
up (e.g staff cost, insurance, license, depreciation, fees). Capital expenditure =
ASSET, Revenue expenditure = EXPENSE
● Equity (AKA Capital or Reserve) - Residual interest in assets of an entity after
deducting all the liabilities. Profits increases equity, Losses decreases equity.
Statement of Financial Position
● Shows financial position
● Shows assets and liabilities of an entity and its equity at a specific date (e.g as at 31
December 2019)
Income Statement
● Statement of comprehensive income
● Shows financial performance
● Income minus expenses for a period of time = profitability
● (e.g for the year ended 31 December 2019)
Statement of Cash Flows
● Shows financial performance
● Shows movement in cash for a specified period (e.g for the year ended 31 December
2019)
Statements of Changes in Equity
● Changes in equity for one period to the next
● Link between IS and SOFP
, Rules Accountants have to abide by
Legal
● The companies act 2006
● London stock exchange
Accounting standards
● IFRS (big entity)
● FRS (small entity)
● Charities FORP
Law and principles used are the Generally Accepted Accounting Principles (GAAP).
Accounting Equation
SOFP based on Accounting Equation, showing net worth
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