FORMS OF BUSINESS ORIGINS STEWARDSHIP ACCOUNTING RULES/STANDARDS
Sole Proprietorship → business = owner. Around since agricultural rev, Rulers have always relied on admin: Name Standards Issuing body
- 1 person. ownership of property and rights. Steward = control over finance, purchasing etc. IFRS Dominates 144/166 jurisdictions for all/most IASB
- Small (revenues and employees). Need for records/obligations. International publicly accountable companies (87%). International
Need for records to show: Financially Not-for-profit financed by industry and accounting Accounting
- Easy to set up.
- Where money has come from. Resected firms. Standards
- No legal obligation to publish accounts.
CSR AND ESG REPORTING - Where it is going to. Standards EU initiative now international. Board.
- Unlimited liability.
Principles-based. Based in
Partnership → business = owners. International Sustainability and ROLE OF ACCOUNTING AND AGENCY THEORY
2000 pages. London.
- 2 or more. Standards Board (ISSB).
Owner (shares) → conflict of interest → Managers US GAAP National US standards. FASB
- Fairly small but can be large. - New board set up to Generally Branch of US SEC. Financial
- Can be restructures or dissolved by partner embrace standards of Owners employ agents to run the business. Accepted Rules-based. Accounting
agreements. ESG (Environmental - Conflict called agency costs. Accounting 25,000 pages. Standards
- Unlimited liability. Social Governance. - Agency theory Is about minimising these costs. Practice Board
Limited → shares = owners. - Can be done through efficient accounting telling Very political – any changes can cause political interference as US want to be separate.
- Shareholders could be large number. shareholders what’s happening to make decisions – pay
DRIVERS
- Shares to friends and family (Private). people in shares so they have interest in the business.
- Range in size. - Investors need to compare performance of firms.
- Limited liability. AUDITS - Need financial reporting to be cost effective.
- Must publish audited financial statements. - Created need for standards.
Internal External
Listed → - Multinationals with subsidiaries in many companies and global financial markets.
Controls + procedures for record Provide external reasonable assurance:
- Same as above but shares bought on stock
keeping and to protect and safeguard ‘true and fair’ opinion.
market (Public). IFRS CONCEPTUAL FRAMEWORK WHO USES ACCOUNTING INFORMATION
assets. In accordance with standards and regs.
- Tesco, M&S. Deter, prevent and detect fraud. Review work of internal audit. Standards developed in the context of framework: Investors and Owners
Give reasonable assurance. Identify and report problems. - Profits and sales to compare to market.
GROUPS OR CONSOLIDATED - Objectives of reporting and principal user
groups. - Debts – gearing.
FINANCIAL VS MANAGEMENT ACCOUNTING
Some countries have a requirement that you must have FINANCIAL - Key statements. Managers
a company in their country in order to operate there. Financial Management - Qualitative characteristics of useful info. - Areas for improvement.
External use to inform Internal use to support REPORTING - Fundamental concepts, principles and - What needs more/less funding.
- Helps reduce tax.
decisions of investors and decisions. Government
- Different branches.
creditors.
– INTRO convention.
- Tax.
- Feed into the ‘Holding Company’ (the name IASB says the purpose is just to provide financial
Backward looking. Forward looking. - Grants.
and one listed on the NYSE). Highly standardised and Free form and information that is useful to investors.
- Nationalisation/privatisation.
- Accounts are combined and shown as group or regulated. unregulated reports. - Peer company analysis = comparing with
Employees
consolidated. Published according to Real time or published competitors to see overall markets.
- Debts.
regular schedule. when required.
- Capital.
Competitors
PRIMARY FINANCIAL STATEMENTS
- Market comparison.
Dalance sheets (SOFP). - Sales.
Income statements (SOPL). - How they spend their money.
Cashflow statement. - Opportunity for price wars.
SOFP SOPL Cashflow
Oldest statement. Commercial substance Flows in and out.
At one moment in time. rather than cashflows. For an accounting
Assets and liabilities. Stated period. period.
Equity: owners’ Revenue and expenses. From operating,
interests. Profit. investing and financing
activities.
,STATEMENT OF FINANCIAL POSITION (SOFP) OWNERSHIP INTEREST EQUAL AND OPPOSITE SIDES EQUITY – AS RESIDUAL INTERESTS
List of assets and liabilities of a business at a Terms used for different businesses. How funds are used/invested Sources of their funding IFRS definition: “Equity is the residual interest in the assets of the
point in time – to show the resources Type Called Distribution Assets → economic Liabilities → obligations: entity after deducting all its liabilities”.
available and how they are funded. Sole Capital Drawings resources: Financial – owed to creditors.
Assets owned. Other – goods/services owed WHAT IS EQUITY?
Capital structure: Limited/listed Shareholders’ equity Dividends
- Miz of debt-to-equity ratio. Amounts owed from others. to customers. Financing from owners and reinvested earnings.
- More debt = more risk. ‘The purpose of the balance sheet is simply to set out Goods/services owed to the Equity: - Represents value of owners’ interests.
the financial position of a business at a particular business. Investments by owners or
Components: - Investments made by owners into firm + retained
point of time (usually the end of the period).’ amounts retained.
- Snapshot in time. earnings.
- Combines cash flow and SOPL. - Value is different between what they own and owe = net
- Assets, liabilities, equity. LIABILITIES ENTITY CONCEPT NOTES TO THE ACCOUNTS
assets of firm.
Amount of financing from 3rd A business is a sperate legal identity from Accounting policies, standards, and estimates: - How much value of owners’ interests are in accounting
Equity = assets – liabilities.
parties. owners, treated as 2 separate parties. - Used to explain what policies are terms (book value).
- Book value/net assets.
1. The entity has an obligation. - Transactions for firm, assets and applied in the statements. Has no direct relationship with:
2. It is to transfer an economic liabilities are separate to owners. - May also disclose values for accounting - Market value of firm.
ASSETS
resource. - Financial statements represent estimated. - Amount left over if it was liquidated, assets sold off and
Economic resource- right to potential benefits. 3. It is a present one that firm not owners. Qualitative disclosure: debts paid.
Control. exists due to past events. - May include info about what an item is
OWNERS’ EQUITY
Benefit from some past event/transaction. (property etc).
Must be capable of measurement in monetary CLASSIFICATION OF LIABILITIES
- May explain changes over the year. Share Capital and Share Premium:
terms. Current: Greater granularity: - Amount of new capital owners invested since established.
Settled within 12m. - Breakdowns of line items. Retained Earnings:
CLASSIFICATION OF ASSETS
- Accounts/trade payables. - Cumulative earnings generated since it was forms (minus
Current: - Bank loans. dividends paid out to the owners).
Trade or consume within 12m. Non-current: Other Reserves:
- Cash and other financials. Long-term. - Others largely of a technical nature.
- Inventory (raw mat, to finished goods). - Borrowings.
FINANCIAL
STATEMENT OF PROFIT AND LOSS AND EQUITY
- Trade receivables. - Trade payables. REPORTING
- Prepaid expenses/prepayments. - Lease liabilities. Revenue and income → increase equity.
- Loans/mortgages. – SOFP Expenses → reduce equity.
Non-current:
Keep for 12m or more. THE GOING CONCERN PRINCIPLE THE ACCOUNTING EQUATION SUMMARY OF ASSETS OF LIABILITIES
- PP&E, buildings etc.
Assumes the business will continue in operation for the Assets = liabilities + equity.
- Intangible assets → licenses, property Assets (Economic Resources) Liabilities (Obligations) and Equity
foreseeable future. Equity = assets - liabilities. Current Assets Current Liabilities
rights.
- Debts etc are all reported with this assumption Owned by company: Financial obligations – owed by
- Goodwill → accounting artefact. THE ‘BALANCE SHEET’
(normally) so it means that it is assumes they - Cash. firm:
- Other → pension assets, joint
will be paid off. All transactions that are entered into record must - Inventory. - Short-term borrowings.
ventures.
comply with this equation. Owed to company: - Payables → to suppliers
EXAMPLES OF ASSETS HISTORICAL COST CONVENTION - This ensures both side of the SOFP balance. - Deposits held with banks. for goods bought on credit
A transaction must always have at least 2 entries - Receivables → from and not yet paid for.
Owned by company: Going concern justifies use of this principle. customers for goods and - Other liabilities → tax,
into the records for the equation to be satisfied.
- Cash/cash equivalents. Historic cost → most assets recorded at the costs services not yet paid for. employee benefits.
- This dual treatment of all transactions gives
- Tangible/intangible assets. expended on them (what they paid for when they - Prepayments and prepaid Other obligations:
the name ‘double-entry book-keeping’.
Amounts owed to company: bought it). expenses → from suppliers - Unearned income → for
- Sales on credit. Fair value/market value → (certain cases require this). for goods and services paid goods and services
- Loans. Rather than at liquidation or replacement value. for and not yet received. customers paid for and
Services/goods owed to company: not yet delivered.
DEFINITION OF HISTORICAL COST Non-Current Liabilities
- Goods/services paid for in advance.
IFRS Definition: “the historical cost of an asset when it is - Loans from banks.
ASSETS EXCLUDED FROM THE SOFP acquired or created is the value of the costs incurred in - Bonds issued by firm.
acquiring or creating the asset, comprising the - Deferred tax.
HR: Non-Current Assets Owners’ Equity
- Most valuable, but companies do not consideration paid to acquire or create the asset plus
transaction costs”. - Property, plant and - Share capital.
own or control people. equipment. - Retained earnings.
Intangible assets: - Intangible assets. - Other reserves.
- Most only recognised if purchased. - Goodwill.
, SOPL – INCOME STATEMENT CASH FLOWS CAN’T BE USED FOR PROFIT ACCOUNTING ENTRIES SOPL: WHERE OP COMES FROM
Shows revenue and other income earned, Timing mismatch with payments for sales Decide which items (accounts) are impacted. Revenue Revenue from sale of goods and services.
expenses during a period – showed on accrual. and for their related costs = impossible to Cost-of-sales The cost of producing the goods and services sold.
Decide what type of accounting item it is (SOFP –
produce a meaningful value profit for an Gross Profit = Revenues – Cost of Sales
Revenue earned – cost of goods sold, expenses asset/liability OR SOPL – revenue/ costs) Profit from trading activities before the costs of running
accounting period based on cash flows.
etc = profit(loss) = change in owners’ wealth. the business.
Identify whether each item has increased/decreased.
Other Operating Costs of running the business.
ASSESSING PERFORMANCE Check that the accounting equation still holds. Expenses
Core Operating Profit = Gross Profit – Other Operating Expenses
Need to produce meaningful values for period profit.
CREDIT SALES Profit from the firm’s core operating activities.
PAYMENT MEANS FOR GOODS/SERVICES Other Income Income from non-core activities.
Firms transact most of business with one another on Operating Profit Profit Before Interest and Tax (PBIT or EBIT – earnings)
Method Cash on Paid in arrears Paid in credit terms. = Core Operating Profit + Other Operating Income
delivery advance - Typically, 30-60 days. The profits generated from all the firm’s operating assets.
What is Services and Services consumed/ Services/ Free financing or customer.
it? goods paid at goods delivered and goods Have credit risk for supplier. CORE OPERATING PROFIT EXPENSES
the time the paid for later. ordered and People in credit control want to keep payment terms
services are May be invoiced at the paid for in Gross profit – other operating expenses. Product costs, costs of running business,
optional.
consumed or time of delivery (goods) advance. Profits of core operations of the firm. selling/distribution, wide variation in level of
People working in sales and, marketing want generous
good received. or later (services). reporting and presentation.
payment terms. OPERATING PROFIT (PBIT)
Examples Goods from Goods sold by one firm Rent on
WHAT ARE PRODUCT COSTS?
supermarket, to another (invoiced at commercial TRADE RECEIVABLES Core operating profit + other income.
takeaway, food. time), electricity premises, Other income may include rental, equity All costs expended on a good or service that are
consumed (invoiced at tickets for a Amount owed from credit sales.
investment etc. needed to generate revenue from selling it.
later date). flight. - Used to record invoices issued by company to
Shown as OP on firms’ assets. For goods:
customers for goods sold on credit.
- Direct costs like raw materials/labour.
KEY BUSINESS TRANSACTIONS - Amounts owed to the firm. WHAT DO OP GO TO?
- Fair share of manufacturing process.
- Value of gross trade receivables is shown in
Financial creditors:
notes to the accounts. THE MATCHING PRINCIPLE
- Finance expense on loads firm has
TRADE PAYABLES taken out and bonds issued. Costs associated with revenues should be recognised
Tax authorities: in same periods in which revenues are recognised.
Amounts owed for goods bought on credit.
- Tax on infrastructure,
- Used to record value of invoices received for GROSS PROFIT
security/legal, education/health of
goods bought on credit.
employees. Revenue – cost of sales.
- Amounts owed by the firm and shown in SOFP.
Minority interests: Trading profits of the firm before taking account of
IFRS REVENUE - Profits from minority shareholders
EXAMPLE ON NEXT PAGE the firms running costs/any other income.
RECOGNITION or firms’ subsidiaries.
REQUIREMENTS FINANCIAL Owners: PERIOD COSTS (OPERATING COSTS)
Based on satisfying REPORTING CREDIT SALES ACCOUNT MOVEMENTS
- Left over as attributable to owners.
Costs that cannot be easily matched with revenues.
contractual obligations. Operating profit Profit Before Interest
For straightforward sales of – SOPL Inter-relates SOFP, SOPL and SOCF. and Tax (PBIT) =
Manufacturing overheads to product costs.
Corporate overheads to costs of running business.
goods and services, firms Illustrated with credit sales. Profit generated from
may only recognise when: THE ACCRUAL PRINCIPLE all the firm’s operating APPLICATION OF ACCRUAL PRINCIPLE TO PERIOD
TRADE RECEIVABLES AT END OF PERIOD
- Rights to all assets COSTS
economic benefits Revenue should be recognised when earned Trade Receivables at end of period = Trade Receivables at start Finance Interest paid to banks
regardless of when paid for. Costs incurred for services received or things
and responsibilities + Revenue from credit sales expenses and bond holders,
Expenses should be recognised when incurred consumed that cannot easily be matched, should be
for any risks have - Payments received from customers Profit before tax
regardless of when paid for. recognised in the same period in which their
been transferred REVENUE FROM CREDIT SALES Tax expenses Taxes incurred on the
- Focus on commercial substance rather firm’s trading benefits were received/consumed.
from seller to
buyer without than payment means. Revenue from credit sales = Trade receivables at end of period activities.
- Trade receivables at start Profit after tax CORPORATE OVERHEADS
recourse. - Must include costs for the whole time it
- Amount of revenue is ‘enjoyed’. + Payments received from customers Minority The share of the profit Head Office: building costs, staff costs.
interests due to minority
and associated PAYMENTS FROM CUSTOMERS Marketing: running campaigns.
EXAMPLE shareholders (if any) of
costs can be Data centres, call centres etc: running networks etc.
Payments received from customers = Trade receivables at start the firm’s subsidiaries.
measured reliably. Putting depreciation as one cost for a first year May include selling and distribution costs.
+ Revenue from credit sales Net profit Profit attributable to
For goods transfer requires (total) would make it look bad. But spread it the owners. Reported as “Other Operating Expenses” or “Selling,
delivery. across how many years it is owned, looks better. - Trade receivables at end of period General and Administrative Expenses”.
Sole Proprietorship → business = owner. Around since agricultural rev, Rulers have always relied on admin: Name Standards Issuing body
- 1 person. ownership of property and rights. Steward = control over finance, purchasing etc. IFRS Dominates 144/166 jurisdictions for all/most IASB
- Small (revenues and employees). Need for records/obligations. International publicly accountable companies (87%). International
Need for records to show: Financially Not-for-profit financed by industry and accounting Accounting
- Easy to set up.
- Where money has come from. Resected firms. Standards
- No legal obligation to publish accounts.
CSR AND ESG REPORTING - Where it is going to. Standards EU initiative now international. Board.
- Unlimited liability.
Principles-based. Based in
Partnership → business = owners. International Sustainability and ROLE OF ACCOUNTING AND AGENCY THEORY
2000 pages. London.
- 2 or more. Standards Board (ISSB).
Owner (shares) → conflict of interest → Managers US GAAP National US standards. FASB
- Fairly small but can be large. - New board set up to Generally Branch of US SEC. Financial
- Can be restructures or dissolved by partner embrace standards of Owners employ agents to run the business. Accepted Rules-based. Accounting
agreements. ESG (Environmental - Conflict called agency costs. Accounting 25,000 pages. Standards
- Unlimited liability. Social Governance. - Agency theory Is about minimising these costs. Practice Board
Limited → shares = owners. - Can be done through efficient accounting telling Very political – any changes can cause political interference as US want to be separate.
- Shareholders could be large number. shareholders what’s happening to make decisions – pay
DRIVERS
- Shares to friends and family (Private). people in shares so they have interest in the business.
- Range in size. - Investors need to compare performance of firms.
- Limited liability. AUDITS - Need financial reporting to be cost effective.
- Must publish audited financial statements. - Created need for standards.
Internal External
Listed → - Multinationals with subsidiaries in many companies and global financial markets.
Controls + procedures for record Provide external reasonable assurance:
- Same as above but shares bought on stock
keeping and to protect and safeguard ‘true and fair’ opinion.
market (Public). IFRS CONCEPTUAL FRAMEWORK WHO USES ACCOUNTING INFORMATION
assets. In accordance with standards and regs.
- Tesco, M&S. Deter, prevent and detect fraud. Review work of internal audit. Standards developed in the context of framework: Investors and Owners
Give reasonable assurance. Identify and report problems. - Profits and sales to compare to market.
GROUPS OR CONSOLIDATED - Objectives of reporting and principal user
groups. - Debts – gearing.
FINANCIAL VS MANAGEMENT ACCOUNTING
Some countries have a requirement that you must have FINANCIAL - Key statements. Managers
a company in their country in order to operate there. Financial Management - Qualitative characteristics of useful info. - Areas for improvement.
External use to inform Internal use to support REPORTING - Fundamental concepts, principles and - What needs more/less funding.
- Helps reduce tax.
decisions of investors and decisions. Government
- Different branches.
creditors.
– INTRO convention.
- Tax.
- Feed into the ‘Holding Company’ (the name IASB says the purpose is just to provide financial
Backward looking. Forward looking. - Grants.
and one listed on the NYSE). Highly standardised and Free form and information that is useful to investors.
- Nationalisation/privatisation.
- Accounts are combined and shown as group or regulated. unregulated reports. - Peer company analysis = comparing with
Employees
consolidated. Published according to Real time or published competitors to see overall markets.
- Debts.
regular schedule. when required.
- Capital.
Competitors
PRIMARY FINANCIAL STATEMENTS
- Market comparison.
Dalance sheets (SOFP). - Sales.
Income statements (SOPL). - How they spend their money.
Cashflow statement. - Opportunity for price wars.
SOFP SOPL Cashflow
Oldest statement. Commercial substance Flows in and out.
At one moment in time. rather than cashflows. For an accounting
Assets and liabilities. Stated period. period.
Equity: owners’ Revenue and expenses. From operating,
interests. Profit. investing and financing
activities.
,STATEMENT OF FINANCIAL POSITION (SOFP) OWNERSHIP INTEREST EQUAL AND OPPOSITE SIDES EQUITY – AS RESIDUAL INTERESTS
List of assets and liabilities of a business at a Terms used for different businesses. How funds are used/invested Sources of their funding IFRS definition: “Equity is the residual interest in the assets of the
point in time – to show the resources Type Called Distribution Assets → economic Liabilities → obligations: entity after deducting all its liabilities”.
available and how they are funded. Sole Capital Drawings resources: Financial – owed to creditors.
Assets owned. Other – goods/services owed WHAT IS EQUITY?
Capital structure: Limited/listed Shareholders’ equity Dividends
- Miz of debt-to-equity ratio. Amounts owed from others. to customers. Financing from owners and reinvested earnings.
- More debt = more risk. ‘The purpose of the balance sheet is simply to set out Goods/services owed to the Equity: - Represents value of owners’ interests.
the financial position of a business at a particular business. Investments by owners or
Components: - Investments made by owners into firm + retained
point of time (usually the end of the period).’ amounts retained.
- Snapshot in time. earnings.
- Combines cash flow and SOPL. - Value is different between what they own and owe = net
- Assets, liabilities, equity. LIABILITIES ENTITY CONCEPT NOTES TO THE ACCOUNTS
assets of firm.
Amount of financing from 3rd A business is a sperate legal identity from Accounting policies, standards, and estimates: - How much value of owners’ interests are in accounting
Equity = assets – liabilities.
parties. owners, treated as 2 separate parties. - Used to explain what policies are terms (book value).
- Book value/net assets.
1. The entity has an obligation. - Transactions for firm, assets and applied in the statements. Has no direct relationship with:
2. It is to transfer an economic liabilities are separate to owners. - May also disclose values for accounting - Market value of firm.
ASSETS
resource. - Financial statements represent estimated. - Amount left over if it was liquidated, assets sold off and
Economic resource- right to potential benefits. 3. It is a present one that firm not owners. Qualitative disclosure: debts paid.
Control. exists due to past events. - May include info about what an item is
OWNERS’ EQUITY
Benefit from some past event/transaction. (property etc).
Must be capable of measurement in monetary CLASSIFICATION OF LIABILITIES
- May explain changes over the year. Share Capital and Share Premium:
terms. Current: Greater granularity: - Amount of new capital owners invested since established.
Settled within 12m. - Breakdowns of line items. Retained Earnings:
CLASSIFICATION OF ASSETS
- Accounts/trade payables. - Cumulative earnings generated since it was forms (minus
Current: - Bank loans. dividends paid out to the owners).
Trade or consume within 12m. Non-current: Other Reserves:
- Cash and other financials. Long-term. - Others largely of a technical nature.
- Inventory (raw mat, to finished goods). - Borrowings.
FINANCIAL
STATEMENT OF PROFIT AND LOSS AND EQUITY
- Trade receivables. - Trade payables. REPORTING
- Prepaid expenses/prepayments. - Lease liabilities. Revenue and income → increase equity.
- Loans/mortgages. – SOFP Expenses → reduce equity.
Non-current:
Keep for 12m or more. THE GOING CONCERN PRINCIPLE THE ACCOUNTING EQUATION SUMMARY OF ASSETS OF LIABILITIES
- PP&E, buildings etc.
Assumes the business will continue in operation for the Assets = liabilities + equity.
- Intangible assets → licenses, property Assets (Economic Resources) Liabilities (Obligations) and Equity
foreseeable future. Equity = assets - liabilities. Current Assets Current Liabilities
rights.
- Debts etc are all reported with this assumption Owned by company: Financial obligations – owed by
- Goodwill → accounting artefact. THE ‘BALANCE SHEET’
(normally) so it means that it is assumes they - Cash. firm:
- Other → pension assets, joint
will be paid off. All transactions that are entered into record must - Inventory. - Short-term borrowings.
ventures.
comply with this equation. Owed to company: - Payables → to suppliers
EXAMPLES OF ASSETS HISTORICAL COST CONVENTION - This ensures both side of the SOFP balance. - Deposits held with banks. for goods bought on credit
A transaction must always have at least 2 entries - Receivables → from and not yet paid for.
Owned by company: Going concern justifies use of this principle. customers for goods and - Other liabilities → tax,
into the records for the equation to be satisfied.
- Cash/cash equivalents. Historic cost → most assets recorded at the costs services not yet paid for. employee benefits.
- This dual treatment of all transactions gives
- Tangible/intangible assets. expended on them (what they paid for when they - Prepayments and prepaid Other obligations:
the name ‘double-entry book-keeping’.
Amounts owed to company: bought it). expenses → from suppliers - Unearned income → for
- Sales on credit. Fair value/market value → (certain cases require this). for goods and services paid goods and services
- Loans. Rather than at liquidation or replacement value. for and not yet received. customers paid for and
Services/goods owed to company: not yet delivered.
DEFINITION OF HISTORICAL COST Non-Current Liabilities
- Goods/services paid for in advance.
IFRS Definition: “the historical cost of an asset when it is - Loans from banks.
ASSETS EXCLUDED FROM THE SOFP acquired or created is the value of the costs incurred in - Bonds issued by firm.
acquiring or creating the asset, comprising the - Deferred tax.
HR: Non-Current Assets Owners’ Equity
- Most valuable, but companies do not consideration paid to acquire or create the asset plus
transaction costs”. - Property, plant and - Share capital.
own or control people. equipment. - Retained earnings.
Intangible assets: - Intangible assets. - Other reserves.
- Most only recognised if purchased. - Goodwill.
, SOPL – INCOME STATEMENT CASH FLOWS CAN’T BE USED FOR PROFIT ACCOUNTING ENTRIES SOPL: WHERE OP COMES FROM
Shows revenue and other income earned, Timing mismatch with payments for sales Decide which items (accounts) are impacted. Revenue Revenue from sale of goods and services.
expenses during a period – showed on accrual. and for their related costs = impossible to Cost-of-sales The cost of producing the goods and services sold.
Decide what type of accounting item it is (SOFP –
produce a meaningful value profit for an Gross Profit = Revenues – Cost of Sales
Revenue earned – cost of goods sold, expenses asset/liability OR SOPL – revenue/ costs) Profit from trading activities before the costs of running
accounting period based on cash flows.
etc = profit(loss) = change in owners’ wealth. the business.
Identify whether each item has increased/decreased.
Other Operating Costs of running the business.
ASSESSING PERFORMANCE Check that the accounting equation still holds. Expenses
Core Operating Profit = Gross Profit – Other Operating Expenses
Need to produce meaningful values for period profit.
CREDIT SALES Profit from the firm’s core operating activities.
PAYMENT MEANS FOR GOODS/SERVICES Other Income Income from non-core activities.
Firms transact most of business with one another on Operating Profit Profit Before Interest and Tax (PBIT or EBIT – earnings)
Method Cash on Paid in arrears Paid in credit terms. = Core Operating Profit + Other Operating Income
delivery advance - Typically, 30-60 days. The profits generated from all the firm’s operating assets.
What is Services and Services consumed/ Services/ Free financing or customer.
it? goods paid at goods delivered and goods Have credit risk for supplier. CORE OPERATING PROFIT EXPENSES
the time the paid for later. ordered and People in credit control want to keep payment terms
services are May be invoiced at the paid for in Gross profit – other operating expenses. Product costs, costs of running business,
optional.
consumed or time of delivery (goods) advance. Profits of core operations of the firm. selling/distribution, wide variation in level of
People working in sales and, marketing want generous
good received. or later (services). reporting and presentation.
payment terms. OPERATING PROFIT (PBIT)
Examples Goods from Goods sold by one firm Rent on
WHAT ARE PRODUCT COSTS?
supermarket, to another (invoiced at commercial TRADE RECEIVABLES Core operating profit + other income.
takeaway, food. time), electricity premises, Other income may include rental, equity All costs expended on a good or service that are
consumed (invoiced at tickets for a Amount owed from credit sales.
investment etc. needed to generate revenue from selling it.
later date). flight. - Used to record invoices issued by company to
Shown as OP on firms’ assets. For goods:
customers for goods sold on credit.
- Direct costs like raw materials/labour.
KEY BUSINESS TRANSACTIONS - Amounts owed to the firm. WHAT DO OP GO TO?
- Fair share of manufacturing process.
- Value of gross trade receivables is shown in
Financial creditors:
notes to the accounts. THE MATCHING PRINCIPLE
- Finance expense on loads firm has
TRADE PAYABLES taken out and bonds issued. Costs associated with revenues should be recognised
Tax authorities: in same periods in which revenues are recognised.
Amounts owed for goods bought on credit.
- Tax on infrastructure,
- Used to record value of invoices received for GROSS PROFIT
security/legal, education/health of
goods bought on credit.
employees. Revenue – cost of sales.
- Amounts owed by the firm and shown in SOFP.
Minority interests: Trading profits of the firm before taking account of
IFRS REVENUE - Profits from minority shareholders
EXAMPLE ON NEXT PAGE the firms running costs/any other income.
RECOGNITION or firms’ subsidiaries.
REQUIREMENTS FINANCIAL Owners: PERIOD COSTS (OPERATING COSTS)
Based on satisfying REPORTING CREDIT SALES ACCOUNT MOVEMENTS
- Left over as attributable to owners.
Costs that cannot be easily matched with revenues.
contractual obligations. Operating profit Profit Before Interest
For straightforward sales of – SOPL Inter-relates SOFP, SOPL and SOCF. and Tax (PBIT) =
Manufacturing overheads to product costs.
Corporate overheads to costs of running business.
goods and services, firms Illustrated with credit sales. Profit generated from
may only recognise when: THE ACCRUAL PRINCIPLE all the firm’s operating APPLICATION OF ACCRUAL PRINCIPLE TO PERIOD
TRADE RECEIVABLES AT END OF PERIOD
- Rights to all assets COSTS
economic benefits Revenue should be recognised when earned Trade Receivables at end of period = Trade Receivables at start Finance Interest paid to banks
regardless of when paid for. Costs incurred for services received or things
and responsibilities + Revenue from credit sales expenses and bond holders,
Expenses should be recognised when incurred consumed that cannot easily be matched, should be
for any risks have - Payments received from customers Profit before tax
regardless of when paid for. recognised in the same period in which their
been transferred REVENUE FROM CREDIT SALES Tax expenses Taxes incurred on the
- Focus on commercial substance rather firm’s trading benefits were received/consumed.
from seller to
buyer without than payment means. Revenue from credit sales = Trade receivables at end of period activities.
- Trade receivables at start Profit after tax CORPORATE OVERHEADS
recourse. - Must include costs for the whole time it
- Amount of revenue is ‘enjoyed’. + Payments received from customers Minority The share of the profit Head Office: building costs, staff costs.
interests due to minority
and associated PAYMENTS FROM CUSTOMERS Marketing: running campaigns.
EXAMPLE shareholders (if any) of
costs can be Data centres, call centres etc: running networks etc.
Payments received from customers = Trade receivables at start the firm’s subsidiaries.
measured reliably. Putting depreciation as one cost for a first year May include selling and distribution costs.
+ Revenue from credit sales Net profit Profit attributable to
For goods transfer requires (total) would make it look bad. But spread it the owners. Reported as “Other Operating Expenses” or “Selling,
delivery. across how many years it is owned, looks better. - Trade receivables at end of period General and Administrative Expenses”.
