Accounting Information

• Primary Users of Financial Statements:

  • Investors (current or future); to know whether business is worth investing
  • Lenders; help with decisions about whether to extend credit and how much
  • Other creditors; helps determine whether amounts owning to them will be paid when due
• Statement of Profit or Loss or Income Statement:

  Covers all income and expenses during an accounting period
• Statement of Financial Position or Balance Sheet:

  Includes all assets, liabilities and equity capital
• Statement of Cash Flows:

  Sources of cash generation and cash used during an accounting period
• Limitations of Financial Statements:

  • Mainly historical information
  • Doesn't capture non-financial aspects of business
  • Substantial degree of classification, aggregation and allocation (cost and revenues may differ)
• Going Concern Concept:

  • Assumption business will continue operating in foreseeable future
  • Assets, liabilities, income and expenses valued using historical cost
  • If business not likely to continue assets valued for net realisable value
• Accruals Concept:

  • Income, expenses, assets and liabilities are recognised when the transaction takes place
  • Revenue is recorded in accounts when earned and expenses recorded when incurred and matched with revenue
• Relevance:

  To be relevant, financial information should have;

  • Predictive Value: Can be used to make predictions or forecasts of future outcomes
  • Confirmatory Value: Can provide feedback about previous decisions
• Faithful Representation:

  Faithfully represented information has:

  • Completeness: All the information a user needs to understand the event
  • Neutrality: No bias in the selection or presentation of the information
  • Freedom from error: No errors or omissions in describing the event
  • Neutrality: supported by prudence
  • Prudence: Exercise of caution when making judgements under conditions of uncertainty
• Timeliness and Comparability:

  • Timeliness: Information is available to users in time to be used for decisions
  • Comparability: Enables users to identify and understand similarities and differences between items
• Verifiability and Understandability:

  • Verifiability: Different users would agree that economic event is faithfully represented, auditors verify information for investors
  • Understandability: Information should be clearly and concisely represented, complex transactions should be explained quickly
• Main Books of Prime Entry:

  • Sales day book
  • Purchases day book
  • Cash book
  • Petty cash book
  • Payroll
  • The journal
• Product Cost:

  • Matched directly with revenues
  • Related to production of a product or service
  • Included in cost of goods sold
• Period Costs:

  • Costs/expenses which generate revenue but aren't directly traceable to sale of specific item
  • Allocated in time basis and expenses in period they occur
• Capital Expenditure:

  • Associated with items that appear on balance sheet and used by firm for more than one accounting period
  • Relates to short term items that appear in income statements
• Revenue Expenditure:

  • Expenditure of type to be matched against periods revenue, used up in period is identified as revenue expenditure
  • Revenue expenditure will have no value at end of period it relates to
• Examples of Fraud/Theft:

  • Supplier fraud: Employee creates a fake supplier and arranges for the invoices to be paid
  • Fake employee: When employee leaves, another staff member tells payroll that employees bank details have been changed and arranges for salary to be paid into own account
  • Theft: Taking petty cash, stealing inventory or stationary
  • Customer fraud: Customer fail to pay goods or pay using stolen credit cards or cheques
  • Collusion: Where employees act together to defraud employer