Chapter 1

• Accounting consists of two elements:

  • Recording - transactions must be recorded as they occur so that information remains up to date, including sales to consumers, purchases from staff and payments to staff
  • Summarising - transactions for the period are summarised to provide info about the company to interested parties
• Financial Statements include:

  • Statement of profit and loss - shows transactions (income and expenses), reflecting the performance of a business over a period to time.
  • Statement of financial position - shows balances (assets and liabilities), reflects the position of a business at a specific point in time.
• Profit making business entities:

  • Sole trader
  • Partnership
  • Company
• Sole trader: a business owned and operated by one person.

  • simplest form of a business
  • owned and managed by one person (although there might be any number of employees)
  • owner is fully and personally liable for any losses the business might make
• Partnership: a business owned and operated by two or more people.

  • multiple sole traders going into business together
  • jointly owned by a number of partners
  • each partner is jointly and severally liable for any losses the business might make
• Company: business owned by multiple shareholders and operated by directors. Directors may or may not be shareholders.

  • shareholders elect directors to run the business
  • almost always have limited liability, legal distinction between owners and business
  • liability is limited to the nominal value of the shares that they own, meaning their shares may become worthless
• Not-for-profit entities:

  • charities
  • clubs and societies
  • government (public sector) organisations

  All of the above will also need to have accounting information and prepare financial statements
• According to IAS1 Presentation of financial statements, a full set of financial statements include:

  • statement of financial position
  • statement of profit and loss
  • statement of changes in equity
  • statement of cash flows
  • notes to the financial statements
• Statement of financial position: list of assets and liabilities of the business, snapshot of the business at a particular point.

  Assets: things the business owns

  Liabilities: things the business owes
• Order of a statement of financial position:

  Assets

  Non-current Assets

  Current Assets

  Total Assets

  Equity and Liabilities

  Equity

  Non-Current Liabilities

  Current Liabilities

  Total Equity and Liabilities
• Non-current assets/liabilities: greater than 12 months

  Current assets/liabilities: less than 12 months

  Equity: special type of liability that is due to the owners
• 'Total Assets' and 'Total Equity and Liabilities' must balance on the statement of financial position.

  This is because all assets have been funded by either equity of debt.
• Statement of profit or loss: shows the revenue and expenses of a business for the accounting period.

  Revenue - 'sales' income from principle trading activity

  Costs of sales - 'direct costs' costs due to sales
• Order of Statement if Profit and Loss:

  Gross profit

  Operating profit

  Profit before tax

  Net profit/(loss) for the period
• Capital Expenditure is recorded on the SFP in non-current assets

  Incurred either:

  • to acquire long-term assets (kept in the business for more than 12 months) e.g. purchase of an oven
  • to improve the earning capacity of a long term asset e.g. building an extension on property
• Revenue Expenditure is recorded in the statement of profit and loss within expenses.

  Incurred either:

  • for trading purposes, purchase of raw materials or items for resale, expenditure on wages or salaries, selling and distribution expenses, admin expenses
  • to maintain existing earning capacity of long term assets e.g. roof repairs
• Financial statements are regulated by legislation, the application of judgement using established accounting concepts and standards as well as generally accepted accounting practice (GAAP)
• Financial statements are derived from the application of judgement in applying accounting concepts. Different peoples judgement could result in different conclusions. E.g. deciding if expenditure is revenue or capital.

  The exercise of judgement in accounting matters should always be underpinned by ethical principals.
• Both the International Ethics Standards Board for Accountants and the ICAEW have produced codes of ethics that state the fundamental ethical principles that all professional accountants should adhere to. These aren't a law but are an expectation.
• The IESBA Code of ethics sets out five fundamental principles of professional ethics that accountants should adhere to. 'POPIC'

  Professional competence and due care - continuing duty to maintain professional knowledge

  Objectivity - not allow bias, conflict of interest or undue influence

  Professional behaviour - avoid any actions that discredit the profession

  Integrity - be straightforward and honest in all relationships

  Confidentiality - should not disclose any such info to third parties without proper and specific authority unless there is a legal or professional right
• ICAEW Code of Ethics is derived from the IESBA code and overrules the IESBA code.
• Chartered accountants are expected to demonstrate the highest standards of professional conduct and to take into consideration the public interest and to maintain the reputation of the accounting profession.
• The ICAEW Code of Ethics applies to members, students, affiliates, employees of member firms and member firms themselves.
• Chartered accountants are expected to follow guidance in fundamental principles in all their professional and business activity whether carried out with or without reward and in other circumstances where to fail to do so would bring discredit to the profession.
• The IESBA and ICAEW codes are principles based and not a set of rules, advantages of this include:

  • the onus of the individual to consider the situation and follow the spirit of the guidance
  • principles encourage compliance whereas rules can cause people to try and outsmart them
  • principles are more adaptable to many different situations
  • rules often cannot keep up with the rapidly changing environment
  • principle systems can still prohibit certain situations where safeguards are not feasible