LUBS1235 - 1. Foundations of Financial Accounting

What is accounting

The process of identifying, measuring, and communicating financial information to help users make informed decisions

What are accounting conventions

Generally accepted rules and principles used when preparing financial statements

What is financial accounting

Accounting that provides historical financial information to external users and is regulated by law and accounting standards.

What is management accounting

Accounting that provides detailed, future-focused information for internal users to support decision-making

What is an asset

A resource owned or controlled by a business

What is a liability

An obligation or amount owed by a business

What is equity

The owner's residual claim on a company's assets after all liabilities are paid 

What is revenue

Income earned from normal business activities

What is an expense

A cost incurred in generating revenue

What types of transactions are recorded in financial accounting

Transactions that can be measured reliably in monetary terms

What is meant by recording transactions

Collecting and organising financial data so it can be summarised into financial statements

Give examples of simple financial transactions

Sales of goods, payment of electricity bills, taking out a bank loan

What is materiality

The concept that information is important if its omission or misstatement could influence users’ decisions

What does materiality depend on

The size and nature of the business and the transaction

Can materiality be qualitative as well as quantitative

Yes, it depends on both the amount and the importance of the information

What are the three main financial statements

Statement of Financial Position, Income Statement, and Statement of Cash Flows

What does the Statement of Financial Position show

Assets, liabilities, and equity at a specific point in time

What does the Income Statement show

Revenue and expenses over a period to calculate profit or loss.

What does the Statement of Cash Flows show

The major sources and uses of cash during a period

What types of organisations produce financial statements

Sole traders, partnerships, companies (Ltd and plc), and not-for-profit organisations

What does “limited” mean in a limited company

Shareholders’ liability is limited to the amount they invested

Who are the main users of financial accounting information?

Investors, lenders, government, analysts, and other stakeholders.

Why do investors use financial statements

To assess profitability, performance, and growth potential

Why do banks use financial statements

To assess liquidity, risk, and the ability to repay loans

What are the fundamental qualities of useful accounting information

Relevance and faithful representation

What does relevance mean in accounting information

The information helps users make decisions and predict or confirm outcomes

What is faithful representation

Information that is complete, neutral, and free from error

What are the enhancing qualities of accounting information

Comparability, timeliness, verifiability, and understandability