Intro to Accounting
• Accounting: collect, analyse and communicate financial info to make more informed decisions
• User groups with an interest in firm: owners, rivals, government, investment analysts, lenders
• Conflict between groups: how the wealth of the business is generated and/or distributed
- Use accounting to determine extent to which various groups have benefitted from the firm
• Accounting reduces uncertainty- availability of funds to pay a return, repay loans, wages
• Impossible to measure how useful accounting reports are to users- unsure if value for money
• Key qualities of accounting info
1. Relevance: can influence decisions but needs to be timely- arrive before decision is made
2. Reliable: free from significant error or bias
3. Comparability: helps to identify changes in the business over time and evaluate performance compared to
rivals. Achieved by treating items that are basically the same in the same manner for accounting purposes.
- Enhance by making it clear what polices were used to measure and present info
4. Understandability
- Materiality: being significant for users ie. won’t clutter up reports or interfere with ability to
interpret info. Will the omission or misrepresentation alter the decisions that users make
• Benefits of extra info decline as it becomes less relevant or harder to process more info. But costs of
extra info rise
• Hard to quantify the costs of providing info- indirect ones like analysing time
• Accounting is also part of the firm’s total information system, helping to allocate
resources efficiently
• 4 Stages of an accounting information system
• 2 strands of accounting: management (focus on needs of managers) and financial
(everyone else)
- Nature of the reports: financial is general but management is specific purpose- for a particular decision and
manager
- Level of detail: financial is broad- detail is lost
- Regulation: financial is subject to accounting regulations but management is internal only
- Reporting Interval: financial is annual, management s whenever needed
- Time Orientation: financial is backwards looking
- Range & quality: financial is info that is in monetary terms and objective
• 3 Types of Business Ownership: sole trader, partnership and limited company. Sole trader and partnership are both
unlimited liability: business not legally separate from owner
• Ltd companies are constrained in how to conduct business and restructure, need to produce financial reports that
may be public
• Ltd companies may have a board of directions who set strategy, control activities and
communicate with owners. The directors elect a chairman to run the board. The board has
a CEO who runs the business day-to-day
• Business Cycle: obtain funds to purchase assets which generate revenue.
• We bear costs called operating expenses, from day to day operations e.g. rent and salaries.
• Take them off revenue to get Earnings Before Income & Tax or operating profit.
• Pay interest off to get net profit then pay taxes to get Profit After Tax.
• Cash Flow Statement: all cash in and out in a period. Issue of time delays
• Income (Profit) Statement: financial value of operational transactions in a period. Sales ad matched expenses.
• Matched: irrespective of whether cash has been paid or received, the sales and associated expenses are recorded e.g.
buy 3 chairs, sell 1- only factor in the revenue from selling 1 chair and expenses of selling that of one chair
• Balance sheet (statement of financial position): all sources of funding by investment in assets.
• Assets, liabilities and equity (investment by the owners of the business)
• Assets= Liabilities + Equity (consists of capital & reserves)
, Intro to Accounting
• E.g. buy 1 table for £50 cash, sell for £100 cash. Cash rise=£50=Profit
• E.g. 2 Buy 1 table on credit and sell for cash.
- Cash increase=£100. Profit=£50 as it doesn’t need to happen at the same time
• E.g. We buy 1 table with cash and buy 1 with credit. We sell 1 table on credit. Cash= (£50) where brackets mean
negative and profit = £50. Profit is this as we only sold 1 table so only factor the cost of 1 table. Other is left in
inventory.
- We use the matching principle: match the revenue of 1 table to the expense of 1 table sold.
• If a new company generated sales of £150,000 but on credit terms and had only received £135,000 in cash. Record
£135,000 on cash flow statement and £150,000 on income statement.
• In the first year of operation, the company incurs operating expenses of £5,000 each month, paid for with one
month’s delay. The total cash paid is £55,000 so that’s on the cash statement.
- On the income statement it’s £60,000. The £5000 left to pay appears on the balance sheet as a liability at the end
of the year.
• Imagine the business purchases a piece of equipment for £50,000 to be used for 5 years.
- Cash statement shows a decrease of £50,000 but the income statement won’t show a charge of £50,000.
• Instead we charge a depreciation on the income statement for each of the 5 years, of £10,000.
- Straight Line method = 50,000/5= 10,000. So we close with £40,000 on the books
• We can charge a depreciation expense (non-cash item) against profits in year 1 for tangible items on the balance
sheet.
- Cost- depreciation= net book value/ carrying amount
E.g. In the 1st financial year, Genius Ltd: 1.Issue 100 ordinary shares with a nominal value of £1 at £1 for cash.
2.Obtain a £50 bank loan @ 10% annual interest. The loan is repayable at end of 5 years. 3.Pay annual rent for the
year of £7. 4.Buy equipment for £50 cash, to be used for 5 years, depreciated using straight line method. 5.Buy
inventory on credit (on account) for £50; by end of year still owed £10 of that £50). 6.Sold on account/credit terms
for £80, 80% of inventory bought; by end of year, account customers still owed £20 of that £80. 7.Paid various
expenses totalling £6, all paid in cash. 8.Paid bank loan interest of £5, and calculated tax bill as £3. 9.Took no salary
but withdrew £10 in cash dividends on last day of year.
• We only sold £80 of items which cost us £40 & not £50- matching
• Operational items (Revenue transactions) being included in the Profit
calculation
• N.b. no share issuing on income statement as it isn’t to do with items sold
nor loans
• Capital items being excluded from the Profit calculation and shown only as
Capital transactions on the Balance Sheet
• Profit statement includes interest payments and taxes. But it excludes the
amount of the loan repaid- that appears on the balance sheet
• Suppliers owed money are usually current liabilities and are often referred to
as trade payables.
• Current= up to 1 year, otherwise long term
• Equipment is an asset: book value as it depreciates by 10 at the end of year 1
• We can have a vertical balance sheet- just put the asset column on top
• Accounting: collect, analyse and communicate financial info to make more informed decisions
• User groups with an interest in firm: owners, rivals, government, investment analysts, lenders
• Conflict between groups: how the wealth of the business is generated and/or distributed
- Use accounting to determine extent to which various groups have benefitted from the firm
• Accounting reduces uncertainty- availability of funds to pay a return, repay loans, wages
• Impossible to measure how useful accounting reports are to users- unsure if value for money
• Key qualities of accounting info
1. Relevance: can influence decisions but needs to be timely- arrive before decision is made
2. Reliable: free from significant error or bias
3. Comparability: helps to identify changes in the business over time and evaluate performance compared to
rivals. Achieved by treating items that are basically the same in the same manner for accounting purposes.
- Enhance by making it clear what polices were used to measure and present info
4. Understandability
- Materiality: being significant for users ie. won’t clutter up reports or interfere with ability to
interpret info. Will the omission or misrepresentation alter the decisions that users make
• Benefits of extra info decline as it becomes less relevant or harder to process more info. But costs of
extra info rise
• Hard to quantify the costs of providing info- indirect ones like analysing time
• Accounting is also part of the firm’s total information system, helping to allocate
resources efficiently
• 4 Stages of an accounting information system
• 2 strands of accounting: management (focus on needs of managers) and financial
(everyone else)
- Nature of the reports: financial is general but management is specific purpose- for a particular decision and
manager
- Level of detail: financial is broad- detail is lost
- Regulation: financial is subject to accounting regulations but management is internal only
- Reporting Interval: financial is annual, management s whenever needed
- Time Orientation: financial is backwards looking
- Range & quality: financial is info that is in monetary terms and objective
• 3 Types of Business Ownership: sole trader, partnership and limited company. Sole trader and partnership are both
unlimited liability: business not legally separate from owner
• Ltd companies are constrained in how to conduct business and restructure, need to produce financial reports that
may be public
• Ltd companies may have a board of directions who set strategy, control activities and
communicate with owners. The directors elect a chairman to run the board. The board has
a CEO who runs the business day-to-day
• Business Cycle: obtain funds to purchase assets which generate revenue.
• We bear costs called operating expenses, from day to day operations e.g. rent and salaries.
• Take them off revenue to get Earnings Before Income & Tax or operating profit.
• Pay interest off to get net profit then pay taxes to get Profit After Tax.
• Cash Flow Statement: all cash in and out in a period. Issue of time delays
• Income (Profit) Statement: financial value of operational transactions in a period. Sales ad matched expenses.
• Matched: irrespective of whether cash has been paid or received, the sales and associated expenses are recorded e.g.
buy 3 chairs, sell 1- only factor in the revenue from selling 1 chair and expenses of selling that of one chair
• Balance sheet (statement of financial position): all sources of funding by investment in assets.
• Assets, liabilities and equity (investment by the owners of the business)
• Assets= Liabilities + Equity (consists of capital & reserves)
, Intro to Accounting
• E.g. buy 1 table for £50 cash, sell for £100 cash. Cash rise=£50=Profit
• E.g. 2 Buy 1 table on credit and sell for cash.
- Cash increase=£100. Profit=£50 as it doesn’t need to happen at the same time
• E.g. We buy 1 table with cash and buy 1 with credit. We sell 1 table on credit. Cash= (£50) where brackets mean
negative and profit = £50. Profit is this as we only sold 1 table so only factor the cost of 1 table. Other is left in
inventory.
- We use the matching principle: match the revenue of 1 table to the expense of 1 table sold.
• If a new company generated sales of £150,000 but on credit terms and had only received £135,000 in cash. Record
£135,000 on cash flow statement and £150,000 on income statement.
• In the first year of operation, the company incurs operating expenses of £5,000 each month, paid for with one
month’s delay. The total cash paid is £55,000 so that’s on the cash statement.
- On the income statement it’s £60,000. The £5000 left to pay appears on the balance sheet as a liability at the end
of the year.
• Imagine the business purchases a piece of equipment for £50,000 to be used for 5 years.
- Cash statement shows a decrease of £50,000 but the income statement won’t show a charge of £50,000.
• Instead we charge a depreciation on the income statement for each of the 5 years, of £10,000.
- Straight Line method = 50,000/5= 10,000. So we close with £40,000 on the books
• We can charge a depreciation expense (non-cash item) against profits in year 1 for tangible items on the balance
sheet.
- Cost- depreciation= net book value/ carrying amount
E.g. In the 1st financial year, Genius Ltd: 1.Issue 100 ordinary shares with a nominal value of £1 at £1 for cash.
2.Obtain a £50 bank loan @ 10% annual interest. The loan is repayable at end of 5 years. 3.Pay annual rent for the
year of £7. 4.Buy equipment for £50 cash, to be used for 5 years, depreciated using straight line method. 5.Buy
inventory on credit (on account) for £50; by end of year still owed £10 of that £50). 6.Sold on account/credit terms
for £80, 80% of inventory bought; by end of year, account customers still owed £20 of that £80. 7.Paid various
expenses totalling £6, all paid in cash. 8.Paid bank loan interest of £5, and calculated tax bill as £3. 9.Took no salary
but withdrew £10 in cash dividends on last day of year.
• We only sold £80 of items which cost us £40 & not £50- matching
• Operational items (Revenue transactions) being included in the Profit
calculation
• N.b. no share issuing on income statement as it isn’t to do with items sold
nor loans
• Capital items being excluded from the Profit calculation and shown only as
Capital transactions on the Balance Sheet
• Profit statement includes interest payments and taxes. But it excludes the
amount of the loan repaid- that appears on the balance sheet
• Suppliers owed money are usually current liabilities and are often referred to
as trade payables.
• Current= up to 1 year, otherwise long term
• Equipment is an asset: book value as it depreciates by 10 at the end of year 1
• We can have a vertical balance sheet- just put the asset column on top
