Introduction to Financial
Accounting
L2. Introduction to financial accounting
- Accounting – the process of identifying, measuring and communicating financial information
about a business entity
o method is constant for sole traders, companies and partnerships
- cash balance = money in – money out
o cash is NOT profit
- Matching – to calculate financial performance in a period, all income due must be matched
with all expenses incurred to generate that income
o Incurred ≠ paid
- Financial statement that shows financial performance over a period of time is called an
Income statement or Profit and loss account
- Gross profit = total income due – total cost of goods sold
- Net profit = gross profit – (wages + promotion)
- Income statement – summarises all income and expenditure over a period of time
o shows amount of profit (income > expenses) or loss (income < expenses)
o titled “for the year ending 31 December 2024
o Often called trading and profit & loss account
- To report on financial position:
o Cash?
o Amounts owed to him?
o Amounts owed by him?
o Profit or loss?
- Separate entity concept – activities of the business should
be kept separate from the owner’s activities
o Why? – to understand how the business is
operating in its own right
Relevant to HMRC, customers, finance providers
- Balance sheet/ statement of financial position –
financial statement which shows financial position at a
specific point in time
o A snapshot of assets, liabilities and capital at a
single moment
o Titled “balance sheet as at 30 November 2024”
o Assets = liabilities + capital
o Capital = assets - liabilities
o Asset
resources owned/ controlled by the
business to give future economic benefit
cash in bank, stock, machinery
, o Liability (to third parties)
What the business owes (debts, obligations)
Bank overdraft. money owed to external parties
o Capital (to owner)
investment by the owner
money introduced, retained profit
wages come off capital
- Income/ revenue/ turnover – transaction or event which causes an increase in the
ownership interest
- Expenditure (revenue/ capital) – transaction or event which causes a decrease in the
ownership interest
o Revenue expenditure – short term - used in period or matched with revenue for the
period
Eg repairs
o Capital expenditure – long term - expenditure on items used in this period and
future periods
L3. Bookkeeping
-
- Three main principles
o Dual effect
For every transaction there will be at least 2 effects
o Separate entity concept
The activities of the business should be kept separate from the activities of
the owner(s)
o Accounting equation
Assets = liabilities + capital
If asset increases, liabilities or capital must increase (or another asset must
fall)
- Nominal/ general ledger – a ledger is a book, and a ledger account is a page in that book
o Has a page for every item that appears on balance sheet or income statement (p&l
account)
Accounting
L2. Introduction to financial accounting
- Accounting – the process of identifying, measuring and communicating financial information
about a business entity
o method is constant for sole traders, companies and partnerships
- cash balance = money in – money out
o cash is NOT profit
- Matching – to calculate financial performance in a period, all income due must be matched
with all expenses incurred to generate that income
o Incurred ≠ paid
- Financial statement that shows financial performance over a period of time is called an
Income statement or Profit and loss account
- Gross profit = total income due – total cost of goods sold
- Net profit = gross profit – (wages + promotion)
- Income statement – summarises all income and expenditure over a period of time
o shows amount of profit (income > expenses) or loss (income < expenses)
o titled “for the year ending 31 December 2024
o Often called trading and profit & loss account
- To report on financial position:
o Cash?
o Amounts owed to him?
o Amounts owed by him?
o Profit or loss?
- Separate entity concept – activities of the business should
be kept separate from the owner’s activities
o Why? – to understand how the business is
operating in its own right
Relevant to HMRC, customers, finance providers
- Balance sheet/ statement of financial position –
financial statement which shows financial position at a
specific point in time
o A snapshot of assets, liabilities and capital at a
single moment
o Titled “balance sheet as at 30 November 2024”
o Assets = liabilities + capital
o Capital = assets - liabilities
o Asset
resources owned/ controlled by the
business to give future economic benefit
cash in bank, stock, machinery
, o Liability (to third parties)
What the business owes (debts, obligations)
Bank overdraft. money owed to external parties
o Capital (to owner)
investment by the owner
money introduced, retained profit
wages come off capital
- Income/ revenue/ turnover – transaction or event which causes an increase in the
ownership interest
- Expenditure (revenue/ capital) – transaction or event which causes a decrease in the
ownership interest
o Revenue expenditure – short term - used in period or matched with revenue for the
period
Eg repairs
o Capital expenditure – long term - expenditure on items used in this period and
future periods
L3. Bookkeeping
-
- Three main principles
o Dual effect
For every transaction there will be at least 2 effects
o Separate entity concept
The activities of the business should be kept separate from the activities of
the owner(s)
o Accounting equation
Assets = liabilities + capital
If asset increases, liabilities or capital must increase (or another asset must
fall)
- Nominal/ general ledger – a ledger is a book, and a ledger account is a page in that book
o Has a page for every item that appears on balance sheet or income statement (p&l
account)
