Lecture notes
introduction to accounting
- Institution
- University Of Bath (UoB)
intro to the basics of accounting
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MN10668 – lecture 1Financial accounting – concerned with the preparation of reports for external stakeholders
Management accounting – concerned with the preparation of reports for internal
management purposes
Financial
The process of designing and operating an information system for collecting,
measuring and recording an enterprises transaction
Summarising and communicating the results of these transactions to users to
facilitate making financial/economic decisions
Functions
Recording and control of business transactions
Maintain accuracy in recording
Meet law requirements
Present final financial statements to the owners of the business
Present other financial reports analyses
Facilitate the efficient allocation of resources
“The objective of financial statements is to provide information about the financial position
performance and changes in the financial position of an entity that is useful to a wide range
of users for making economic decisions”
Financial statements are used to provide information on company performance (income
statement) and on the financial position of the entity (statement of financial position)
Larger entities also provide information on the financial adaptability of the entity (statement
of cash flows)
These statements are provided with explanatory notes in an annual return also called the
annual report
The annual report also includes reports from management
Financial statements
Statement of profit and loss (income statement)
Shows income generated, expenditure incurred and resultant profit or loss for a
specified period of time, typically one year
This includes – revenue from operating services
Expenses from operating activities
Profit or loss in the period from operating activities
, Other income or expenses
Income statement terminology
Revenue – is the income earned in the period from normal trading activities
When an entity has income from activities that are not its core business such as
receiving interest then this is disclosed separately as ‘other income’
Expenses – are yearly running costs. They are used up in the period reported on.
E.g., electricity used to generate heat and light, rent
Profit or loss – the total income made by the entity in the period less the total
expenses incurred by the entity in the period
Simple view of income statement
Income = revenue and other incomes
Expenses = costs
How much has the business earned
Statement of financial position
What it shows:
Assets – that the business owns/has control of, such as goods for resale(inventory), vehicles
or machinery, trade receivables cash and money at the bank.
i.e. what they own
Liabilities - money that has been borrowed by the business and trade payables
i.e. what they owe
Capital – the amount of capital invested in the business by its owners = assets – liabilities
Raise money by – borrowing money (L) or shareholder investment (L) or initial capital, later
additional capital or earrings retained from the business
Use money to buy and hold assets to support long term business running (A)
Money raised is equal to money usable
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