Week 1: Introduction to Accounting
Accounting
Collecting, analysing and communicating financial information
3 primary activities
1. Identification of an economic event
2. Record the transactions
3. Communicate (Financial Statements)
Accounting can be seen as a provision of a service.
Users of financial information
• Owners
• Customers
• Competitors
• Managers
• Lenders
• Suppliers
• Investment analysis
• Public
• Government
• Employees
Fundamental qualities of accounting information
• Relevance
Information that has the ability to influence decisions
-Predictive
-Confirmatory value
Accounting information information must meet a threshold of materiality.
Materiality
Would a user’s decision change if the information was omitted or misstated?
E.g Error of £0.5m is an expense item. Overall profit is £500m, error is not material at
0.1% of the profit. However, if the error was £20m, then it would 50% of the profit and
would be material.
• Faithful representation
-Completeness
-Neutrality
-Free from errors
Further qualities of accounting information
• Comparability
• Verifiability
• Timeliness
• Understandability
Comparability
Information should allow for comparison between time periods and competitors.
-Consistency
-Disclosure of accounting policies
Verifiability
-Direct verification by auditors
-Verification by reference to external sources or comparisons
,Timeliness
Information should be available to users in good time to allow them to make informed
decisions.
Understandability
-The significance of the information can be by the user
-Terminology must be as simplified as possible
Accounting Conventions
Business Entity Convention
The activities of the business and. The activities of its owners are treated as separate
and distinct.
Historic cost convention
Holds that assets should be recorded at their historic coast i.e acquisition cost.
Prudence convention
Inclusion of a degree of caution in accounting judgements under conditions of uncer-
tainty. In order to overstatement of assets or under statement of liabilities.
Going concern convention
Assumption that the business will continue operations for the foreseeable future.
Dual aspect convention
Each transaction has two aspects.
Matching convention
A business should match related revenues and expenses in the same period.
Two branches of accounting
Financial Accounting- Provides information to shareholders creditors and others
who are outside the organisation.
Management Accounting- Provides information for managers of an organisation
who direct and control its operations.
Financial Accounting Management Accounting
Main users Users other than managers Managers
Time focus Historical perspective Future emphasis
Reporting interval (Usually) annual or bi-annual As frequently as needed by
managers
Verifiability versus relevance Emphasis on verifiable info Emphasis on relevance for
planning and control
Precision v. Timeliness Emphasis on precision Emphasis on timeliness
Subject Focus is on organisation as a Focus on segments or divi-
whole sions of an organisation
Level of details Broad overview Very detailed
Regulations Must follow accounting stan- No accounting standards or
dards and others regulatory regulatory requirements to
, Financial Accounting Management Accounting
requirements follow
Accounting standards
-International accounting standards (IASs)
-International financial reporting standards (IFRS)
-General Accepted Accounting principles (GAAP)
Main elements of financial statements
• Assets
• Liabilities
• Equity
• Revenue
• Expenses
Assets
Resources available to a business.
-Economic benefit must arise from past transaction or event.
-The asset has a cost or value that can be measured reliably.
-Cash Inventory, plant & equipment etc.
Liabilities
Amount owed by a business.
E.g accounts payable, notes payable, salaries and wages payables, etc.
Equity
Amount invested in a business by its owner- the claim of the owner against the busi-
ness. Also known as “owners” claim / ‘ownership interest.
-Original contributions
-Additional contributions
-Retained profits or losses (revenue-expenses)
-Withdrawals (a reduction to ownership interest)
-Recognition totally dependant on the recognition of assets and liabilities
-E.g Share Capital, Ordinary earnings and retained earnings
Revenue/Income
What the business earns from the sale if goods or provision of services.
Expenses- What it costs the business to earn the income
Accounting expenses
A=C + L
Week 2: Adjustments to financial statements
IAS 1
Objective of financial statements:
To provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making decisions.
Complete set of financial statements:-
• Statement of financial position
• Statement of profit or loss
• Statement of changes in equity
, • Statement of cash flows
• Set of explanatory notes (accounting policies and choices)
• Comparative information in respect of the previous period
Statement of profit or loss
It measures and reports how much profit the company has generated over a period.
Revenue
-Inflow of economic benefits
-An increase in asset or a decrease in liability
-E.g sale of goods, fees for services, subscriptions.
Expenses
-Outflow of economic benefits
-A de-
crease
in asset
or an
in-
crease
in liabil-
ity
-E.g
Wages,
and
salaries,
rent, the cost of buying or making the goods, insurance etc.
Format of statement of profit or loss
Accounting
Collecting, analysing and communicating financial information
3 primary activities
1. Identification of an economic event
2. Record the transactions
3. Communicate (Financial Statements)
Accounting can be seen as a provision of a service.
Users of financial information
• Owners
• Customers
• Competitors
• Managers
• Lenders
• Suppliers
• Investment analysis
• Public
• Government
• Employees
Fundamental qualities of accounting information
• Relevance
Information that has the ability to influence decisions
-Predictive
-Confirmatory value
Accounting information information must meet a threshold of materiality.
Materiality
Would a user’s decision change if the information was omitted or misstated?
E.g Error of £0.5m is an expense item. Overall profit is £500m, error is not material at
0.1% of the profit. However, if the error was £20m, then it would 50% of the profit and
would be material.
• Faithful representation
-Completeness
-Neutrality
-Free from errors
Further qualities of accounting information
• Comparability
• Verifiability
• Timeliness
• Understandability
Comparability
Information should allow for comparison between time periods and competitors.
-Consistency
-Disclosure of accounting policies
Verifiability
-Direct verification by auditors
-Verification by reference to external sources or comparisons
,Timeliness
Information should be available to users in good time to allow them to make informed
decisions.
Understandability
-The significance of the information can be by the user
-Terminology must be as simplified as possible
Accounting Conventions
Business Entity Convention
The activities of the business and. The activities of its owners are treated as separate
and distinct.
Historic cost convention
Holds that assets should be recorded at their historic coast i.e acquisition cost.
Prudence convention
Inclusion of a degree of caution in accounting judgements under conditions of uncer-
tainty. In order to overstatement of assets or under statement of liabilities.
Going concern convention
Assumption that the business will continue operations for the foreseeable future.
Dual aspect convention
Each transaction has two aspects.
Matching convention
A business should match related revenues and expenses in the same period.
Two branches of accounting
Financial Accounting- Provides information to shareholders creditors and others
who are outside the organisation.
Management Accounting- Provides information for managers of an organisation
who direct and control its operations.
Financial Accounting Management Accounting
Main users Users other than managers Managers
Time focus Historical perspective Future emphasis
Reporting interval (Usually) annual or bi-annual As frequently as needed by
managers
Verifiability versus relevance Emphasis on verifiable info Emphasis on relevance for
planning and control
Precision v. Timeliness Emphasis on precision Emphasis on timeliness
Subject Focus is on organisation as a Focus on segments or divi-
whole sions of an organisation
Level of details Broad overview Very detailed
Regulations Must follow accounting stan- No accounting standards or
dards and others regulatory regulatory requirements to
, Financial Accounting Management Accounting
requirements follow
Accounting standards
-International accounting standards (IASs)
-International financial reporting standards (IFRS)
-General Accepted Accounting principles (GAAP)
Main elements of financial statements
• Assets
• Liabilities
• Equity
• Revenue
• Expenses
Assets
Resources available to a business.
-Economic benefit must arise from past transaction or event.
-The asset has a cost or value that can be measured reliably.
-Cash Inventory, plant & equipment etc.
Liabilities
Amount owed by a business.
E.g accounts payable, notes payable, salaries and wages payables, etc.
Equity
Amount invested in a business by its owner- the claim of the owner against the busi-
ness. Also known as “owners” claim / ‘ownership interest.
-Original contributions
-Additional contributions
-Retained profits or losses (revenue-expenses)
-Withdrawals (a reduction to ownership interest)
-Recognition totally dependant on the recognition of assets and liabilities
-E.g Share Capital, Ordinary earnings and retained earnings
Revenue/Income
What the business earns from the sale if goods or provision of services.
Expenses- What it costs the business to earn the income
Accounting expenses
A=C + L
Week 2: Adjustments to financial statements
IAS 1
Objective of financial statements:
To provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making decisions.
Complete set of financial statements:-
• Statement of financial position
• Statement of profit or loss
• Statement of changes in equity
, • Statement of cash flows
• Set of explanatory notes (accounting policies and choices)
• Comparative information in respect of the previous period
Statement of profit or loss
It measures and reports how much profit the company has generated over a period.
Revenue
-Inflow of economic benefits
-An increase in asset or a decrease in liability
-E.g sale of goods, fees for services, subscriptions.
Expenses
-Outflow of economic benefits
-A de-
crease
in asset
or an
in-
crease
in liabil-
ity
-E.g
Wages,
and
salaries,
rent, the cost of buying or making the goods, insurance etc.
Format of statement of profit or loss
