Financial Accounting

• Going Concern


  The assumption that the entity will continue in operation for the forseeable future
• True and Fair


  Financial statements are prepared and presented with true and fair views
• Substance over form


  Transactions are recorded according to economic reality, not legal form
• Materiality


  Information is material if its inclusion/omission would change a user's view of the financial statements
• Money Measurement


  Items are measurable in monetary terms
• Historic cost


  Transactions are recorded at the time of completion
• Dual aspect


  All transactions affect two aspects (double entry). Debit and credit.
• Periodicity


  Financial statements should be produced on a periodic basis
• Entity


  The business entity or organisation is separate from the owners of the organisation
• Matching


  Expenses are matched to revenue; expenses are recorded in the period incurred in earning revenue irrespective of when the expenses are paid for
• Realisation


  Revenue which has been earned is recorded in the financial statements when it is reasonably certain that cash will be collected in the near future
• Accruals


  Transactions are recorded in the period in which they occur regardless of when cash is paid for or received
• Prudence


  A prudent attitude should be taken when preparing financial statements
• Consistency


  Accounting treatment of like items should be treated the same within each accounting period and from one period to the next
• Predictive value


  Information is useful in predicting the future
• Confirmatory value


  Confirm past events- value that enable a user to check and confirm earlier prediction
• Materiality threshold


  When its omission or misstatement could influence the economic decisions that users make based on financial statements
• Completeness


  All the information needed for decision making is provided
• Neutrality


  No bias in selecting and presenting the information
• Freedom of error


  The estimated information should have no errors in the way in which information has been selected and described
• Comparability


  Ability to identify similarities and differences between items of information
• Timeliness


  Ability to produce information to users when it is needed ( Relevance)
• Verifiability


  Ability to reach the same result when it is reproduced (based on same data/assumptions used) (Faithfully represent)
• Understanability


  Sufficiently transparent to users
• Assets


  Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events
• Liabilities


  probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events
• Statement of changes in equity

  Reconciles the movement in total equity, from the beginning to the end of its financial period
• The ledger


  A grouping of all the T-accounts, with their balances, providing the balance in each of the accounts as well as keep track of changes in these balances
• Trial Balance


  Statement produced at the end of the accounting period which lists balances of all accounts with debits in one column and credits in the other
• Financial statements include the income statement (profit & loss account), balance sheet, cash flow statement, and notes to the accounts.
• Income statements are used to determine net profit or loss over a given period, while balance sheets show assets, liabilities, and equity as of a particular date.
• The balance sheet is prepared at the end of an accounting period, while the income statement covers only one specific time frame.
• Cash flow statements report inflows and outflows of cash during an accounting period.
• A company's financial statements are prepared annually, with interim reports issued quarterly or half-yearly.
• Profitability Ratios


  Assess company’s ability to generate profit
• Efficiency Ratios


  Assess the company’s ability to manage short term resources
• Liquidity Ratios


  Assess company’s ability to pay short term obligations as they become due
• Leverage Ratios


  Assess financial risk of company
• Investment Ratios


  Help investors decide on whether to invest in company
• Profitability Ratio Types


  Return on ordinary shareholder’s equity

  Return on capital employed

  Gross Profit margin

  Operating profit margin

  Return on total assets