Financial accounting notes for
1. Measuring and Reporting Financial Position
2. Measuring and Reporting financial Performance
3. Accounting for limited companies
4. Measuring and Reporting Cash Flows
Income Statement - Profit and loss account (how much wealth was generated)
Statement of financial position - balance sheet (accumulated wealth of business
at end of period)
Assets
Business resources. Include cash and inventories
Resources must potentially bring economic benefits. should not be available to
other parties at no greater cost.
Economic resource must be under the control of business
Economic resource must be capable of measurement in monetary terms.
Tangible assets have a physical substance and can be touched. Ex-
Inventories
Intangible assets have no physical substance but may provide future benefits.
Ex- Patents.
Current assets are those assets that are held for the short time. For sale or
consumption during operating cycle, for sale within a year, for trading, cash or
nearly cash. Ex- Inventories, trade receivables (amount owed by custmers on
credit) ,and cash.
Non current assets are held for long - term operations. Ex- Property, plant and
equipment.
Final account of business - Represents how much of the asset’s value has been
used up in any given time period
Claims
Obligation to provide cash or some form of other benefit.
Equity- investment or stake of the owner. Owner’s capital. Profits increase
equity and losses reduce it.
Liability- claims of other parties apart from owner. arise when outside party
sells something or gives money to business.
Current liabilities are amounts due for settlement in the short term. Settled
within the operating cycle, exist as a result of trading, settled within a year, no
right to defer settlement beyond a year after the date of SFP. Ex - amount
owed for goods on credit
Non- current liabilities are amounts due for settlement in the longer term. Ex -
Mortgage
Reporting/accounting/ financial period - The period over which businesses
measure their financial results.
Accounting conventions
Business entity convention leads to owners being treated as claimants against
their own business in respect of their investment.
Historic cost convention- value of assets shown on the SFP should be based
on their acquisition cost.
Prudence convention- caution should be exercised while preparing financial
statements.
Going concern convention - there is no intention, or need to sell off the non
current assets of the business.
Financial Accounting Notes 2
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