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Summary IB1240_IFA_Week 1_The Accounting Framework
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The Accounting Framework. Notes summarising all the content from lectures and includes worked examples to better understand concepts. Grade attained: 80%
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[R-IB1240-1] THE FRAMEWORK OF ACCOUNTINGReading: 1.1-1.5, 1.7, 2.1, 2.13, 3.2-3.6, 6.2
ENTITIES AND FINANCIAL REPORTING STATEMENTS
Introduction and History of Accounting
● The earliest form of accounting was known as stewardship accounting as steward were employed
by wealthy individuals to keep count of items they owned (assets) and items they owed (liabilities)
● The type of information collected under the ancient form of accounting is still important today and
is captured in an entity’s annual report - Statement of Financial Position (Balance Sheet)
● The industrial revolution advanced the role and nature of accounting.
○ Accounting was not only for internal control purposes but progressed to provide
information to people who were external to the company and had little knowledge of what
went on in the company
■ Help external owners assess the performance of the company and management.
○ Separation of ownership and control of a company
● Legislation at this time required companies to provide their owners with statements of financial
position and a statement detailing the performance of a company (Statement of Profit and Loss /
Statement of Comprehensive Income)
○ In UK this statement is also called the Profit or Loss Account - outlines the the income and
expenses incurred in the period
■ Difference between income and expenses is the profit or loss for the period
○ Occasionally a third statement - Statement of Cash Flows - was required
■ Shows an entity’s financial adaptability: ability to take effective action to alter the
amount and timing of its cash flows so that it can respond to unexpected needs or
opportunities
● Accounting is categorised into either financial accounting or management accounting
○ Financial accounting
■ Financial accounting is concerned with the preparation of reports for external
stakeholders
○ Management Accounting is concerned with the preparation of reports for internal
management purposes
The Nature and Functions of Financial Accounting
● Financial accounting helps record a company’s financial transactions
● The collection and recording of transaction, refers to the accounting system within an organisation
- typically called a bookkeeping system
○ Bookkeeping system consists of maintaining a record of the nature and monetary value of
the transactions of an organisation
● Summarising and communicating the results of these transactions for users to facilitate making
financial and economic decisions
○ Preparing final financial statements from books of account (or any other system of
recording) showing the profit earned during a given period and financial position of the
company
, The Objective of an Appropriate Accounting System
The Recording and Control of Business Transactions
● Accounting systems need to keep a record of the cash in and out of businesses and the assets and
liabilities of the business
○ Money received: For what? From whom?
○ Money paid: For what? To whom?
○ Liabilities: Loans, For goods (trade payables), For expenses (accruals)
○ Assets: Buildings, Vehicles, Amounts due from customers (receivables), Expenses paid in
advance (Prepayments),
● The control aspect of an accounting system ensures that correct amounts are paid to those entitled
to them at the appropriate time, ensure assets are safeguarded against fraud and misappropriation
and determine the company’s performance
To Maintain Accuracy in Recording
● Transactions are usually recorded using ‘double entry’. Double-entry bookkeeping is regarded as
generally regarded as the most accurate method of bookkeeping
● Each transaction is entered in the books twice, this duplication is considered to be a form of an
internal check, highlighting any errors
To Meet the Requirements of the Law
● The Companies Act 2006 states that companies must keep proper record of their transactions
● There is however no legislation that specifically requires sole traders or partnerships to keep records
of their transactions
To Present Final Financial Statements to the Owners of the Business
● Financial statements will include a Balance Sheet and Statement of Profits or Loss
● The of the objectives of current-day financial statements is the stewardship objective - financial
statements should provide information that is useful for assessing management’s stewardship
function
● Accountability refers to management’s responsibility to provide an account on the way in which
the resources entrusted to them have been used
To Present other Financial Reports and Analyses
● Financial statements are contained within an annual report
● Other reports which provide a vehicle for management team to communicate directly with
stakeholders
○ Includes other reports like the operating and financial review, the directors’ report, the
chairman’s statement, the remuneration report, and the corporate social responsibility
report
● Summary analysis of the performance and financial standing of the business are usually provided
in these other reports. Typically include the use of ratio analysis
To Facilitate Efficient Allocation of Resources
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