Exam Material
ACCOUNTING
GENERAL INFORMATION
Definition Finance
The study of how businesses raise funds and select appropriate investments.
Definition Accounting
identification, recording, analysis & reporting financial information
financial info users make better judgements & decisions concerning business
Why Accounting?
Management decisions: allocation of resources
Language of business: interpretation of a company’s operations & finances
Planning and control: helps business planning and control for eventual irregularities
Daily life: personal financial investment decisions
Characteristics
timeliness = provision of accounting information in time for users to make a decision
relevance = ability to influence decisions
understandability = enables those for whom it is primarily compiled to understand
materiality = differing quality of so omission/ misrepresentation is possible
reliability = assurance to users that information provided is verifiable
comparability = helps users to identify similarities and differences between items of information
History of accounting
improved framework greater international harmonization
more outward looking & new methods for managing costs
strategic management (course to achieve objectives, considering commercial & economic environment)
caused by fast changes & competition
Types of accounting
Management accounting
The identification, measurement and communication of accounting information for the managers of a business.
Financial accounting
identification, measurement and communication of accounting information for external users (users other than the
manager)
differences: nature & detail of reports, duration & frequency, range & quality of information
Users of financial information
owners competitors lenders government employees
customers managers suppliers investment community
analysts representatives
Business ownerships
Proprietorship
easy set-up 6 flexible operation, unlimited liability
Partnership
easy set-up, shared but unlimited liability, ownership risks with unreliable partners
Limited company
rules for operations, limited liability (most businesses)
, MEASURING & REPORTING FINANCIAL POSITION
Major financial statements
Balance sheet
statement of financial position: what is the accumulated wealth of the business at the end of a certain period?
Income statement
profit & loss account: how much wealth (profit) was generated/lost by the business over a certain period?
Cash-flow statement
what cash movements (in/out) were made by the business over a certain period?
Final accounts
income statement, statement of cash flows and statement of financial position taken together
Accounting conventions
Business entity convention
business and its owners are treated as quite separate and distinct
Historic cost convention
historic cost = acquisition cost
Prudence convention
cautious accounting judgements(reporting actual & expected losses immediately, reporting profits when they arise)
Going concern convention
It is assumed that there is no intention, or need, to liquidate the business
Dual aspect convention
each transaction has two aspects and that each aspect must be recorded in the financial statements
ACCOUNTING
GENERAL INFORMATION
Definition Finance
The study of how businesses raise funds and select appropriate investments.
Definition Accounting
identification, recording, analysis & reporting financial information
financial info users make better judgements & decisions concerning business
Why Accounting?
Management decisions: allocation of resources
Language of business: interpretation of a company’s operations & finances
Planning and control: helps business planning and control for eventual irregularities
Daily life: personal financial investment decisions
Characteristics
timeliness = provision of accounting information in time for users to make a decision
relevance = ability to influence decisions
understandability = enables those for whom it is primarily compiled to understand
materiality = differing quality of so omission/ misrepresentation is possible
reliability = assurance to users that information provided is verifiable
comparability = helps users to identify similarities and differences between items of information
History of accounting
improved framework greater international harmonization
more outward looking & new methods for managing costs
strategic management (course to achieve objectives, considering commercial & economic environment)
caused by fast changes & competition
Types of accounting
Management accounting
The identification, measurement and communication of accounting information for the managers of a business.
Financial accounting
identification, measurement and communication of accounting information for external users (users other than the
manager)
differences: nature & detail of reports, duration & frequency, range & quality of information
Users of financial information
owners competitors lenders government employees
customers managers suppliers investment community
analysts representatives
Business ownerships
Proprietorship
easy set-up 6 flexible operation, unlimited liability
Partnership
easy set-up, shared but unlimited liability, ownership risks with unreliable partners
Limited company
rules for operations, limited liability (most businesses)
, MEASURING & REPORTING FINANCIAL POSITION
Major financial statements
Balance sheet
statement of financial position: what is the accumulated wealth of the business at the end of a certain period?
Income statement
profit & loss account: how much wealth (profit) was generated/lost by the business over a certain period?
Cash-flow statement
what cash movements (in/out) were made by the business over a certain period?
Final accounts
income statement, statement of cash flows and statement of financial position taken together
Accounting conventions
Business entity convention
business and its owners are treated as quite separate and distinct
Historic cost convention
historic cost = acquisition cost
Prudence convention
cautious accounting judgements(reporting actual & expected losses immediately, reporting profits when they arise)
Going concern convention
It is assumed that there is no intention, or need, to liquidate the business
Dual aspect convention
each transaction has two aspects and that each aspect must be recorded in the financial statements
