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Lecture notes Accounting And Finance
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This document provide all financial accounting basics you need as a first year student
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Topic 1: the basic accounting equationAccounting: Identify, collect, measure, analyse and communicate financial
information.
Financial information refers to actual transactions undertaken by
organisations.
The main financial statements produced by an organisation are:
-Statement of Financial Position (balance sheet). This is a statement of
assets owned and liabilities owed by the business at a certain date.
-Income Statement (profit and loss account). This records the income
earned and expenses incurred over a period (generated wealth).
-Cash Flow Statement. This records the movement of cash over a period
(accumulated wealth).
-Statement of changes in equity.
-Notes.
Accounting qualities:
1) Relevance Make accounting
2) Materiality information
useful.
3) Faithful representation
4) Comparability
5) Verifiability
Enhance the usefulness of
6) Timeliness accounting information.
7) Understandability
, 1) Relevance
Associated with information that is timely, useful, has predictive value, and is going
to make a difference to a decision maker.
2) Materiality
an accounting standard can be ignored if the net impact of doing so has such a small
impact on the financial statements that a user of the statements would not be
misled.
3) Faithful representation
The concept that financial statements be produced that accurately reflect the
condition of a business.
Accounting terms:
§ Assets: Resources owned by a business.
Non-current assets: buildings, transportation.
Current assets: trade receivables, inventory.
§ Liabilities – Amount owed to third parties (obligations).
Non-current liabilities: long-term debt.
Current liabilities: trade payables, short-term debt.
§ Equity: Investment that the owner makes and is owed back to the
owner.
The residual interest in the assets of the company after deducting all its
liabilities.
Business Entity
Owes
Owns - Assets - Equity – Amount
introduced by the owners.
Liability – Loans,
payables.
, The Accounting Equation
Assets = Liabilities + Owners’
Equity
The Income Statement
The purpose of the income statement (profit and loss account) is to measure
and report how much profit or loss the business generated over an accounting
period.
Total expenses
Profit = Total revenue - incurred in generating.
for period
the revenue
Key Terms
• Revenue: inflow of economic benefits from ordinary activities.
– Examples: sales of goods, sales of services.
• Expenses: outflow of economic benefits arising from ordinary
activities.
– Examples: salaries, rent, rates, electricity, water.
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