Summary
Summary Financial Accounting Fundamentals S2
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Summary of the semester 2 content from the Financial Accounting Fundamentals module at Loughborough University.
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AccountingKey concepts Provide useful financial information for stakeholders to make economic decisions
Financial statements = Fundamental (relevance, faithful representation) and enhancing characteristics
(timeliness, comparability, understandability, verifiability)
Materiality – makes a difference to the decisions of users (quantitative and qualitative materiality)
Substance over legal form – record transactions based on their economic substance and include notes to
explain the figures
The going concern assumption – entity will continue in the business for the foreseeable future unless directors
intend to wind-up company or no realistic alternative, no intention or need to liquidity
Consistency – same accounting methods and practices, unless clearly states and explained comparability
Entity concept – the entity is considered a separate economic unit to limit liability (UK Company Law), parents
and subsidiaries
Prudence – degree of caution by not overstating assets and understating liabilities
Accruals – recording revenue when earned and expenses when the benefit is received
Statement of Profit or Loss - Financial performance of the entity over a period of time (Income – Expenses)
Revenue: Principles of revenue recognition
Cost of Sales: Cost of goods/services provided (Closing inventory = Opening
Inventory + Purchases – Cost-of-Sales)
Distribution Costs + Administration Expenses: based on services received
(adjust for accruals and prepayments
Finance Costs: interest expense = interest rate x outstanding loan balance
Tax Expense: based on profit for the year and tax rules
Statement of Financial Position (aka balance sheet)
Financial position of the entity at a particular date (Equity = Assets – Liabilities)
Non-Current Assets: property, plant and equipment
Current Assets: inventory, trade receivables, cash (order = reverse order
of liquidity/closest to cash)
Total Assets
Non-Current Liabilities: bank loan
Current Liabilities: overdraft, trade payables, tax payables
Total Liabilities
Net Assets
Equity: Share Capital, Share Premium, Retained earnings
, Equity = the residual interest in the assets of the entity after deducting all its liabilities
Statement of Profit or Loss and Other Comprehensive income
(can separate into 2 separate financial statements)
NBV = cost – accumulated depreciation – impairment loses
Revaluation gains/loses revaluation reserve (other comprehensive income), can’t be paid as dividend
Statement of changes in Equity
Components of Equity:
o Share Capital and Share Premium
o Retained earnings, Revaluation Reserve and Other Reserves
(£) Share Capital Share Premium Retained Revaluation Total
Earnings Reserve
As at the start of x x x x x
the year
Profit for the year x x
Revaluation gain x x
Reserves transfer x (x) -
Issue of shares x x x
Dividends (x) (x)
As at the end of x x x x x
the year
Reserves transfer = due to revaluation, the whipped accumulated depreciation can go into retained earnings
UK Company Law
Limited company in legal person
Shareholders have limited liability useful info in financial statements
Creditors and lenders at risk
Prepare annual accounts (IFRS) (UK = GAAP)
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