Accounting fundamentals

Objective of financial reporting

• provide financial information

• that is useful to existing and potential investors, lenders and other creditors

• in making decisions

IAS 1 Presentation of Financial statements

financial statement comprises of:

• SOFP (called the balance sheet in the UK)

• SPL

• SOCIE

• SOCF

• and notes

Conceptual framework

• accounting standards are based upon the CF

• but it is not itself an accounting standard

Qualitative characteristics of financial information

Fundamental characteristics

• Relevance

• Faithful representation

Enhancing characteristics

• Verifiability

• Timeliness

• Understandability

• Comparability

Materiality

• could influence decisions made

Going concern

• entity viewed as continuing in operation for the foreseeable future 

• no intention nor necessity of liquidation or of ceasing to trade

When prepping FS’s assumed that the business will continue to operate for the next 12 months

Asset

• something valuable that is owned or controlled

• NCA = long term use

• CA = expected to be converted to cash in 1 year

Liability

• owed to a third party 

• NCL - debts payable after one year

• CL - debts payable within one year

Income

• increases in assets or decreases in liabilities due to increases in equity/capital which do not relate to contibutions from holders of equity claims 

• includes both revenue and gains

Expenses

• decrease in asets or increases in liabilities 

• the inverse of income

Capital

• the amount an entity owes the owner 

IAS 1 shows and assists

• shows the results of managements stewardship 

• assists users in predicting the entities future cash flows - timings and uncertainties 

Fair presentation

• faithful representation

• what is requires?

  • selection and application of accounting policies

  • presentation of in formation in relaible relevant comparable and understandable

  • includes additional disclosures to enable understanding of the impact of particular transactions events or conditions

Departures from the IFRS

• very rare

• may be required to achieve fair presentation

Accrual basis for accounting

• account for things when they happen not when the cash is paid or recieved

• income earned must be matched against the expenditure incurred in earning it

Historical cost

• items often stated in FS’s at historical cost

• objectivity of FS maximised 

• there is a source document to prove the amount paid to purchase an asset or pay an expense 

• In times of rising priced historical cost convention will lead to asset values being too low and profits too high 

Sustainability

• meeting the needs of the present without compromising future generations’ ability to meet their own needs

• ISSB - Internation sustainability standards board board

• formed in 2021

IFRS S2

Climate related disclosures

• impacts - how business affects ESG issues 

• dependencies - how these factors affect a companies ability to create and maintain value

IFAC code of ethics

• Integrity

• Objectivity 

• Professional competence and due care 

• Confidentiality 

• Professional behaviour

ICAEW code of ethics

• accountants should be guided by the terms and the spirit of the Code 

Accounting equation simple

Assets = capital + liabilities

Accounting equation complex

Assets = capital + profit - drawings + liabilities

Source document

• record of a transaction

• invoice

• credit note

• bank transaction report

Other documents (not source but still important)

• Delivery note

• Goods received note

• Debit note

Payroll

• the record of wages and salary costs

Pay components

• Net pay = 

• Gross pay

• Less

  • PAYE

  • EE NIC

  • EE pension contributions 

  • Net pay

• Additional costs for the employer 

  • ER NIC

  • ER pension contributions 

Total payroll cost

Gross pay + ER NIC + ER pension

Standing data

• reference data which does not regularly change like the name of the business

Processing

• real time (updated at the point a transaction takes place)

• batch (process a number of transactions together as a group usually at the end of each day or week)

Cloud accounting

• cloud computing

• cloud accounting

Cloud accounting advantages

• data and software are up to date 

• accessible from multiple locations 

• more than one person can access at a time 

• no need for expensive local copies and backups 

Cloud accounting disadvantages

• requires intenret access

• increased cyber risks from hacking or loss/damage to data 

• lack of control over security and backupos (this is provided by the service provider) 

AI

• the creation and use of AI models to perfom tasks traditionally requiring human intelligence

• ability to adapt to new informaiton and environments 

AI uses in accounting

• entering digital documents inot accounting software 

• categorising expenses 

• performing bank reconciliations 

• ID potential fraud and errors 

• generating reports 

Disadvantages of AI in accounting

• high initial cost

• diffculty in processing non-standard transaction leading to potential errors

• reliant on trainig data quality

• security risks 

Principle of double entry

• each transaction gives rise to two accounting entries 

• one Debit and one Credit 

Acronym

DEAD CLIC

Trial balance

• balance brought down on each ledger account seperated into debits and credits 

• when balancing expenses or income call it transfer to SPL rather than bal c/d or bal b/d

Inventories

year end adjustment

Cost of sales

opening inventory + purchases + delivery inwards - closing inventory 

unsold goods should not be included in the COS 

Ledger accounting for inventories

• opening = Dr COS Cr inventories 

• purchases = Dr COS Cr purchases

• closing = Dr inventories Cr COS

Measuring inventories

Quantity x valuation

Valuation

Use the lower of cost and NRV

Cost

• cost of purchase + cost of conversion + other costs incurred in bringin inventories to present location and condition

NRV

• estimated selling price - estimated costsof completion - selling and distribution costs 

Netting off

• LINE BY LINE 

• lower of cost and NRV

• aggegate and use for valuation x quantity

Mark up

• profit/cost x 100

Margin

profit/sales x 100

Writing off inventory

• lost stolen damaged or obsolete 

• value as nothing if they are worthless 

• or their NRV if this is lower than their original cost 

Insurance claim on inventory

• taking cost of goods stolen or destroyed out of purchases and including under expenses 

• insurance claim treated as other income in calculating net profit 

• if not yet received in cash it is treated as other receivables 

Inventory drawing

• if owner takes good out for personal use

• dont adjust opening or closing

• automatically taken into accoutn when doing stock count

• reduce cost of sales with the cost of items withdrawn (take the item out of purchases)