Accounting Introduction

• Accounting


  Collecting, analysing and communicating financial information
• Types of accounting

  • Financial accounting
  • Management accounting
• Financial accounting

  Organisation and external stakeholders (those who have an interest in the business e.g., suppliers, consumers, shareholders)
• Management accounting

  Organisation A and Organisation A (internally)
• Main financial statements in accounting

  • Income statement (profit and loss account)
  • Balance sheet (statement of financial position)
  • Cash flow statement
• Income statement (profit and loss account)


  Information about how much profit or loss a business makes
• Income statement (profit and loss account)

  • Shows If the business makes profit or loss during a particular period
• Balance sheet (statement of financial position)

  The financial position of the firm – what a firm owns, owes and is worth
• Cash flow statement


  How much cash is coming in and going out of the business (cash flow = cash in – cash out)
• Income

  Represents increases in economic benefits during the accounting period in the form or inflows or enhancements of assets or decreases of liabilities
• Revenue (sales from main trading activities)

  Income earned in the period from normal trading activities
• Expenses (reduces profits)


  Day-to-day running costs that the business will have to pay
• Expenses are also known as revenue expenditure
• Revenue expenditure for the year must be listed in the profit and loss account
• Examples of expenses

  • Rent
  • Rates
  • Wages
  • Heating
  • Lighting
• Accruals concept


  Income and expenses are recognised (recorded) as soon as they occur (not necessarily when cash or its equivalent is received or paid)
• Accruals concept


  • Revenues are recorded when they are earned and not when they are received in cash
  • Expenses are recorded when they are incurred and not when they are paid
• Profit or loss


  Total income for the period – the total expenses incurred for the period (income – expense)
• Statement of financial position (balance sheet)


  An itemised statement of what one owns, what one owes and what one is worth
• Components of the statement of financial position

  • Assets (what one owns)
  • Liabilities (what one owes)
  • Equity (what one is worth)
• Assets


  A resource controlled by the entity, as a result of past events, from which future economic benefits are expected to flow to the entity
• Types of assets

  • Non-current assets
  • Current assets (used within a year)
• Non-current assets

  Assets that the entity expects to use for periods that extend beyond one year
• Types of non-current assets

  • Tangible assets (can be seen and touched – property, plant and equipment)
  • Intangible assets (not physical in nature – intellectual property rights e.g., patents, reputation)
• Current assets

  Cash and other assets that the entity expects to turn to cash within one year
• Types of current assets

  • Cash
  • Inventory
  • Trade receivables
  • Prepayment
• Liabilities

  Present obligation of an entity, arising from past events, settlement of which is expected to result in an outflow of resources that embody economic benefits
• Types of liabilities

  • Non-current liabilities (liabilities that the entity expects to settle in periods that extend beyond one year e.g., mortgage)
  • Current liabilities (liabilities that the entity expects to pay within one year)
• Types of current liabilities

  • Short term borrowing (overdraft)
  • Trade payables
  • Accrual
• Capital (equity)


  Amount of capital invested in the business by its owners (net of withdrawals) + retained profit
• Accounting equity concept

  Accounting concept which treats a business separately from its owner (two separate entities)
• MUST distinguish private from business transactions
• Components of the accounting equation

  • Capital = assets – liabilities
  • Assets = capital + liabilities
  • Ending capital = opening capital + additional capital + profit(-loss) – drawings (owner withdrawals for personal use)
• Accounting equation

  How much is the business worth?
• Assets = capital + liabilities

  What the business owns (capital = internal claim, liabilities = external claim)