Financial Accounting Fundamentals
Financial Statements
1. Primary Statements
Statement of Profit or Loss (income statement) – shows the financial performance of the
entity during a particular period
Statement of Financial Position (balance sheet) – shows the financial position of the entity at
a particular date
Statement of Changes in Equity – change in equity from the start to end of a period of time
Statement of Cash Flows – presents cash movements of an entity
2. Accounting Policies – summarises the rules followed in preparing the financial statements using
accounting standards
3. Notes to the Accounts – provides more details about the numbers in the financial statements
Purpose of Financial Statements:
Management accounting use to make internal business decisions to maximise growth
Financial accounting display figures/information externally to users, to be audited
Users of Financial Statements
Shareholders – buy/sell/hold Competitors – revenue/profit, merger or acquisition
Future investors – invest or not CEP/CFO/Managers – assess performance, strategy,
Government – strategy dividends
Auditors – omissions/fraud Suppliers – credit worthiness
Banks/lenders – lend? Risk of default Employees – job security, wages, pensions, bonuses
HMRC - tax Customers – size/resources, future trading
Credit rating agencies – loan? Local People - stability
Pressure groups (environmental) – protests, ownership
International Accounting Standards Board (IASB)
Conceptual Framework – provide information, principles, reporting practices
Relevant – difference in decisions, predictive value, confirmatory value
Faithful – ‘true and fair’, completeness, neutrality, freedom from error
Compatibility, timeliness, verifiability, understandability
International Financial Reporting Standards (IFRS)
Different types of business:
Sole trader – an individual selling goods or providing Partnership – when two or more people come
a service together and combine their skills, provide resources
and increase efficiency
1. Ordinary – legally partnered
2. Limited Liability - legally separate
Limited Company Not for Profit
1. Private – no shares to public 1. Chairty
2. Listed - shares on stock market, dividends 2. Trust
3. Housing Association
, Financial Accounting
Day to day Year End Financial Statements
Recording transactions Produce trial balance Prepare from accounting
(sales, purchases, cash) Year-end adjustments records
Follow IASB
Statement of Profit or Loss (income – expenses)
Types of Income:
o Revenue = from ordinary activities of the entity (sales of goods or provision of services)
o Other income = non-revenue income (profit from PPE)
Types of Expenses
Cost of sales – production, manufacturing,
Administrative expenses – rent, energy costs, cleaning, maintenance
Tax expenses – corporation tax
Distribution costs – postage, packaging, transport
Finance costs – business rates, interest, loans, insurance
Statement of Financial Position (Equity = Assets – Liabilities)
Assets – economic resource that is controlled by an entity due to past events and has the pot3ential to
produce economic benefits in the future
Current asset if the entity expects to realise, sell or consume the asset within the next 12 months or the
normal operating cycle and it is cash and is to be used in trading
Current = inventory, cash, trade receivables, prepayments
Non-current = Property, plant and equipment
market share, customers and employees are NOT ASSETS as not controlled
Recognised in SoFP when the economic benefit flows into the entity and the asset has a cost/value that can be
measured reliably
Liabilities – a present obligation of the entity to transfer an economic resource as a result of past events
Current liability if it will be settles in the next 12 months or within the normal operating cycle, or there is no
unconditional right to defer payment beyond 12 months and it is to be used in trading
Current = trade payables, tax payables, accruals, overdrafts, interest payables
Bank Loans depend on repayment terms (Current/Non-Current)
Recognised when the outflow of resources embodying economic benefit settles the present obligation and the
amount can be measured reliably
Equity – the residual interest in the assets of the entity after deducting all its liabilities
Share Capital and Share Premium – cash invested into the company for shares
Retained earnings and other reserves – value generated by the company, belongs to owners
Financial Statements
1. Primary Statements
Statement of Profit or Loss (income statement) – shows the financial performance of the
entity during a particular period
Statement of Financial Position (balance sheet) – shows the financial position of the entity at
a particular date
Statement of Changes in Equity – change in equity from the start to end of a period of time
Statement of Cash Flows – presents cash movements of an entity
2. Accounting Policies – summarises the rules followed in preparing the financial statements using
accounting standards
3. Notes to the Accounts – provides more details about the numbers in the financial statements
Purpose of Financial Statements:
Management accounting use to make internal business decisions to maximise growth
Financial accounting display figures/information externally to users, to be audited
Users of Financial Statements
Shareholders – buy/sell/hold Competitors – revenue/profit, merger or acquisition
Future investors – invest or not CEP/CFO/Managers – assess performance, strategy,
Government – strategy dividends
Auditors – omissions/fraud Suppliers – credit worthiness
Banks/lenders – lend? Risk of default Employees – job security, wages, pensions, bonuses
HMRC - tax Customers – size/resources, future trading
Credit rating agencies – loan? Local People - stability
Pressure groups (environmental) – protests, ownership
International Accounting Standards Board (IASB)
Conceptual Framework – provide information, principles, reporting practices
Relevant – difference in decisions, predictive value, confirmatory value
Faithful – ‘true and fair’, completeness, neutrality, freedom from error
Compatibility, timeliness, verifiability, understandability
International Financial Reporting Standards (IFRS)
Different types of business:
Sole trader – an individual selling goods or providing Partnership – when two or more people come
a service together and combine their skills, provide resources
and increase efficiency
1. Ordinary – legally partnered
2. Limited Liability - legally separate
Limited Company Not for Profit
1. Private – no shares to public 1. Chairty
2. Listed - shares on stock market, dividends 2. Trust
3. Housing Association
, Financial Accounting
Day to day Year End Financial Statements
Recording transactions Produce trial balance Prepare from accounting
(sales, purchases, cash) Year-end adjustments records
Follow IASB
Statement of Profit or Loss (income – expenses)
Types of Income:
o Revenue = from ordinary activities of the entity (sales of goods or provision of services)
o Other income = non-revenue income (profit from PPE)
Types of Expenses
Cost of sales – production, manufacturing,
Administrative expenses – rent, energy costs, cleaning, maintenance
Tax expenses – corporation tax
Distribution costs – postage, packaging, transport
Finance costs – business rates, interest, loans, insurance
Statement of Financial Position (Equity = Assets – Liabilities)
Assets – economic resource that is controlled by an entity due to past events and has the pot3ential to
produce economic benefits in the future
Current asset if the entity expects to realise, sell or consume the asset within the next 12 months or the
normal operating cycle and it is cash and is to be used in trading
Current = inventory, cash, trade receivables, prepayments
Non-current = Property, plant and equipment
market share, customers and employees are NOT ASSETS as not controlled
Recognised in SoFP when the economic benefit flows into the entity and the asset has a cost/value that can be
measured reliably
Liabilities – a present obligation of the entity to transfer an economic resource as a result of past events
Current liability if it will be settles in the next 12 months or within the normal operating cycle, or there is no
unconditional right to defer payment beyond 12 months and it is to be used in trading
Current = trade payables, tax payables, accruals, overdrafts, interest payables
Bank Loans depend on repayment terms (Current/Non-Current)
Recognised when the outflow of resources embodying economic benefit settles the present obligation and the
amount can be measured reliably
Equity – the residual interest in the assets of the entity after deducting all its liabilities
Share Capital and Share Premium – cash invested into the company for shares
Retained earnings and other reserves – value generated by the company, belongs to owners
