Professional Documents
Culture Documents
TOPICS
Financial accounting
Accounting terminology
Main financial statements
Accounting ratios
Management accounting
Costs: type and behavior
Main costing systems
Contribution analysis
Short-term decision making
What is ACCOUNTING?
Accounting is the language of business (a company aims to make a profit/has a
societal goal)
Definition #2: Accounting = The provision of information to managers and
owners so that they can make business decision
It is about recording, preparing and interpreting business transactions
It answers key questions, such as: how much profit have we made?
Types of Accounting
Distinction between Financial Accounting and Management Accounting
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FINANCIAL ACCOUNTING
It provides financial information about the financial performance of a
business
It is required by law
It is backward-looking
Its main purpose is the preparation of the major financial statements (3)
Aimed at external users (shareholders, banks, interest groups)
MANAGEMENT ACCOUNTING
It provides detailed information about the performance of the internal
activities
It is backward-looking and forward-looking
It is NOT required by law
It is focused on cost accounting and decision making
Its main purpose is to assist the managers in operating the business
Aimed at internal users
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1) Accounting context - factors:
History
Country
Organizational (structure + nature of the business)
Technological
2) Types of accountancy
Auditing = checking that the financial statements, prepared by managers, give
a true and fair view of the accounts
Bookkeeping = entering monetary transactions into the books of account
Financial Accounting = preparation and interpretation of the financial accounts
Financial Management = managing the sources of finance of an organization
Insolvency
Management Accounting = internal accounting of an organization
Fraud Detection
Taxation
Management Consultancy
3) Types of accountant
Professionally Qualified Accountants (6 institutions in UK)
o Chartered Accountant (3 institutes operate in the UK)
Second-Tier Bodies
4) Limitations of Accounting – its historic nature and its failure to measure non-
financial transactions
5) Language of accounting
Income = the revenue earned by a business (not equal to cash received!)
Expenses = the costs incurred in running a business (not equal to cash paid!)
Assets = items owned (or leased) by the business which will bring economic benefits
Liabilities = amounts the business owes to a third party (trucks, equipment, buildings,
inventory)
Equity (Capital) = the assets less its liabilities to third parties = the owner’s interest in
business
Income – Expenses = PROFIT Assets – Liabilities = EQUITY
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ANNUAL REPORT
It is composed by:
Financial statements
Additional financial and non-financial information
Main purpose: evaluation of the performance of the business
Frequency, purpose and users may differ
Sensitive information is NOT disclosed (strategic reasons)
Available in:
Company website (Investor Relations)
EDGAR SEC (US listed companies)
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Exercise #1
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Exercise #2
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Accounting principles
A. Accounting conventions
Entity = a business has a distinct and separate identity from its owners
Monetary measurement = only items which can be measured in financial
terms are included in the accounts (e.g. pollution NOT, but a fine on pollution YES)
Historical cost = the amount recorded in the accounts will be based on the
original amount paid for a good or service
Periodicity = statements are prepared for a set period of time
Exercise #3
Prudence = income and profits should be only recorded when they are
certain and provisions or liabilities should be recorded as soon as they are recognized
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Mini-case
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Basic rules of double-entry bookkeeping
1. For every transaction, there must be a debit and a credit entry.
2. These debit and credit entries are equal and opposite.
3. In the cash book all account paid in are recorded on the debt side, whereas
all amounts paid out are recorded on the credit side.
Four major types of items 1. Assets 2. Liabilities and equity 3. Income 4. Expenses
1. Assets
- Essentially items owned or leased by a business which will bring economic
benefits. Two main sorts of tangible assets (i.e., assets with a physical existence):
I. Non-current assets – can be divided into intangible assets such as patents
(goodwill) and tangible assets: property, plant and equipment. These are infrastructure
assets NOT USED in the day-to-day trading!!! They are assets in use usually over a long
period of time.
i. Motor vehicles
ii. Land and buildings
iii. Fixtures and fittings
iv. Plant and machinery
II. Current assets – used in the day-to-day trading
i. Inventory (Stock)
ii. Trade receivables (Debtors)
iii. Cash
Short-term: (i) Trade payables (creditors) (ii) Bank overdraft (iii) Proposed taxation
(companies only)
Long-term: (i) Bank loan repayable after several years (ii) Mortgage loan
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3. Income – day-to-day revenue earned by the business (e.g. sales)
4. Expenses – day-to-day costs of running a business (e.g. rent and rates, electricity,
wages)
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Main factors which complicate profit:
- The accruals/matching concept
- Estimation
- Changing prices
- The wearing out of assets
Impairment = an asset will have lost more value than is accounted for via depreciation.
Capital expenditure = a payment to purchase an asset with a continuing use in the
business such as an item of property, plant and equipment
Revenue expenditure = a payment for a current year’s good or services such as
purchases for resale or telephone expenses.
4 steps:
1. Determine the Cost of sales => opening stock + purchases – closing inventory
(adjust purchases for purchases returns)
2. Sales – Cost of sales = Gross Profit (adjust sales for sales return)
3. List and total all expenses
4. Determine net profit
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In relation to the steps!
1. All the property, plant and equipment (i.e., tangible non-current assets) are added
together.
2. Total assets (current + non-current) are determined next => total assets
3. Total liabilities are determined
4. Net assets = total assets – total liabilities
5. Closing equity = Opening equity + net profit
D. Depreciation:
1. First, a proportion of the original cost is allocated as an expense in the income
statement
2. Second, an equivalent amount is deducted from the property, plant and
equipment in the statement of financial position
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E. Bad and doubtful debts – some may not be collected, while some other will
almost certainly not be collected
Bad debts = recorded as an expense in the income statement and written
off trade receivables in the statement of financial position
Provision for the impairment of receivables = set up by a business for
those debts it is dubious about collecting. It is always deducted from trade receivables in
the statement of financial position. BUT only increases/decreases in the provisions are
entered in the income statement! (an increase – as an expense; a decrease – as an
income)
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