Introduction to Financial accounting and the preparation of the Financial Statements that a business must produce. It also introduces the basic accounting principles that Accountants use daily.
Accounting is a way of recording, analysing and summarising transactions of an entity. It
allows businesses to make good financial choices.
Sole traders are a single person business i.e a local shopkeeper and therefore the owner is
responsible for all liabilities within the business. Partnerships involve two or more people
within the business, and they are also personally responsible for their business’ liabilities.
Companies have owners and shareholders which unlike partnerships and sole traders, they
are only responsible for their share. However, companies have more legal requirements
such as being liable for corporation tax.
Capital expenditure is the expense for long term investments in order for the business to
run. For example, buildings, vehicles, and machinery. On the other hand, revenue
expenditure is short term spending to keep the business going i.e wages and advertisement.
Investors and creditors are primary users of financial information. Other users interested in
this information are known as stakeholders. Managers need the information to make
decisions on future financing and employment. Owners are interested in the risk to their
shares and the return they will get for taking that risk. Lenders of long-term investments
want to make sure the company can keep paying the loan back. Suppliers want to know they
will be able to pay for goods. HMRC needs to assess tax liabilities. Employees want to know
the stability of their employers and their ability to give retirement and employment benefits.
It is needed by government for national statistics. Customers want to know it’s a secure
source of supply which they can continue to use. Finally regulatory bodies need to check
they comply with the law.
For accounting information to be useful, it must have certain qualities. The fundamental
qualitative characteristics are relevance and faithful representation. Relevant information
can have a big impact on the decision made by users. Faithful representation means that
data is complete so users can make a fair judgement, it’s also unbiased and free from major
errors. The fundamental characteristics can be enhanced by the enhancing qualitative
characteristics. It should allow comparisons to be made to establish similarities and
differences between other pieces of data. Its also verifiable so that it can be proven by other
users, being provided in plenty of time so that users can make decisions and should be
understandable for people with a basic standard of knowledge.
Faithful presentation should fairly present the position and condition of an entity. Going
concern convention means the entity is seen as continuing for the foreseeable future and
shouldn’t need to be liquidated.
Misstatements or omissions of items in a statement are material if they have a significant
impact on economical decisions on the basis of financial statements.
Financial statements of limited companies are regulated by a number of rules. The
companies act of 2006 states that all companies should annually publish financial
statements. They must follow the accounting standards which are developed by FRC in the
UK.
Professional accountants must follow a code of ethics. This includes integrity (honesty),
objectivity (not allowing bias or decisions to be swayed), professional competence
(maintains knowledge and skill), confidentiality (respect confidential information) and
professional behaviour.
The sum of assets will always be the sum of liabilities plus the equity. A company’s financial
position at the time depends on the economic resources, financial structure, liquidity
(availability of short-term cash) and solvency (long-term access to funds) and its adaptability.
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