Financial Accounting

CIPFA Financial Accounting (FA)

What is… Profit

Is made when income is greater than expenses

What is… Public sector

The process of recording and reporting the financial performance of government organizations

What is the… Private Sector

A business that generates profit for its owners

What is a… Sole trader

An individual who both owns the business and carries out the work e.g. builder. An individual trading alone, is solely liable for all the business debts, manual or computerised accounts

What is a… limited liability company

A business owned by shareholders who may have no direct involvement in running the business e.g. supermarket chain

What is a… Not-for-profit organisation

An organisation whose purpose is to operate in the interest of its members rather than generate a profit for owners e.g. golf club

What is the… Business entity concept

Requires that a business and its owner are treated as separate entities

What is… Money measurement

Financial information only takes into account those items that can be stated in monetary terms

What is the… Stable monetary unit

A unit, for example, £ or $, is used in the financial statements. It is assumed that the value of the monetary unit is constant

What is… Duality

Every transaction has two equal sides, meaning the accounting equation is always balances

What is the… Historical cost

Transactions are recorded at their original cost

What is an… Accounting period (or reporting period)

Financial statements are prepared on a regular basis, usually every 12 months. It is the time interval which the financial statements cover

What is… Going concern

The expectation that a business will continue to operate normally for at least the next twelve months

What is… Consistency

The same approach applied from one period to the next to allow comparison of the numbers reported

What is the… Accruals/matching concept

Transactions are reported in the period to which they relate regardless of the cash movements related to those transactions

What is… Prudence

A reserved approach which recognises losses as they arise, but defers profits until they are fully realised

What is… Separate determination

An organisation cannot ‘net-off’ liabilities against assets e.g. No netting a positive bank account + overdraft

What is… Objectivity

An accountant should not include personal opinion or prejudice when preparing financial statements. The statements should be neutral or free from bias

What is… Realisation

Profits and revenue should only be included in the financial statements when they are recognised and all known expenses and losses should be provided for

What is… True and fair view

The financial statements are required to give a true and fair view, presenting fairly in all material respects, the financial results and position of the entity. This means the financial statements should be materially (substantially) correct and unbiased

What is… Substance over form

The legal form of a transaction may sometimes differ from the commercial substance. If this is the case, the financial statements should show the commercial substance of the transaction and its impact upon an organisation

What is… Materiality

The threshold level above which the omission, addition or misstatement of an item would influence the decision of a user

What are… the Intrnational Accounting Standards Board (IASB) responsibilities

1. To develop global accounting standards

2. To promote the use and application of those standards

3. To bring about convergence of national accounting standards and International Financial Reporting Standards

What is… Capital

The funding brought into the business by the owner

What is… Revenue

The value (usually the selling price) of goods or services transferred to customers during the period

What is… Income

The money that is received in return for services or goods, can be classified as capital or revenue. Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims

What is… Capital income

The proceeds from the sale of non-trading assets e.g. sale of vehicle or machinery

What is… Revenue income

Income derived from e.g. the sale of goods held in inventory

What are… Expenses

The costs incurred in generating revenue during the period. Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims

What is… Capital expenditure

Results in the purchase of non-current assets

What is… Revenue expenditure

Expenditure incurred for the purpose of the trade or to maintain non-current assets, e.g. salaries, rent or electricity costs

What is the… Accounting Equation

Assets = Capital + Liabilities

What is the… Statement of financial position

A statement showing a summary of the financial position of an organisation on a particular date

What is the… Income statement

A statement in which revenues and expenditure are matched to arrive at a figure of profit or loss. It summarises the income and expenses of the business to calculate the profit (income minus expenses). This is built up by transferring all of the income and expense balances out of their accounts and into the statement (also called ‘closing’ the accounts). The net profit (final profit figure) for the period will be credited to the capital account. NB the income statement is also a ledger account in its own right and is prepared from the various revenue and expense accounts whic are closed off in this process

What is an… Asset

A resource that a business owns or controls that has monetary value and can be used to create economic value. A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits

What are the two types of assets

Tangible and intangible

What is a… Tangible asset

A physical asset e.g. property, plant and equipment

What is an… Intangible asset

Assets which do not have physical form, they cannot be touched e.g. a patent

What can assets be categorised as

Current and non-current e.g. when they can realised

What are… Non-current assets

Assets that are expected to be of continuing use to the organisation, e.g. land, buildings, vehicles, equipment and IT. Used by a business for longer than one year

What are… Current assets

Items that the business consumes during an accounting period e.g. Inventory, Trade receivables, Prepayments, Short term investments, Cash/bank

What is… Equity

‘The residual interest in the assets of the entity after deducting all its liabilities.’ This means that an entity’s equity is the monetary measure (the value) of the entity once all its liabilities have been deducted from its assets

What are… Liabilities

A company's debts or financial obligations. A present obligation of the entity to transfer an economic resource as a result of past events

What can liabilities be categorised as

Current and non-current, depends on when they are due to be paid

What are… Non-current liabilities

Liabilities that are not due for repayment within the next accounting period (twelve months) e.g. Loans, mortgage

What are… Current liabilities

Liabilities that are due for repayment within the next accounting period e.g. Loans repayable within one year, bank overdraft, Trade payables, Taxation payable, Accrued charges

What is the… Formula for closing Capital

Closing Capital (c/f) = Opening Capital (b/f) + New capital introduced + Net Profit – Drawings

What is the… Formula for Income Statement

Profit/Loss = Revenue – Expenses

What is… Gross profit

is the difference between revenue and cost of sales

What are… Cost of sales

is the matching cost of the goods sold. Sometimes referred to as direct costs

What is the… Formula to reflect the direct costs of acquiring or producing goods for resale

Cost of sales = Opening Inventory + Purchases – Closing Inventory Net profit

What is the… Formula for Net profit

Net profit = gross profit less expenses plus non-trading income

What are the… Accounting Standards

Are documents which give guidance on how to prepare financial statements

What is the… Conceptual Framework

Is a set of principles guiding how financial statements should be prepared

What are the… Characteristics of useful information categorised as

Fundamental or enhancing

What are the… Two Fundamental qualitative characteristics

Relevance and Faithful representation

What is… Relevance

Financial information that is capable of making a difference in the decisions made by users

What is… Faithful representation

Is complete, neutral, and free from [material] error.

What are Enhancing characteristics

Comparable, Verifiable, Timely, Understandable

What is… Comparable

Information about a reporting entity is more useful if it can be measured with similar information about other entities and with similar information about the same entity for another period or another date

What is… Verifiable

Different knowledgeable and independent observers could reach consensus, that a particular depiction is a faithful representation

What is… Timely

Means having information available to decision – makers in time to be capable of influencing their decisions

What is… Understandable

Classifying, characterising and presenting information clearly and concisely make it comprehensible

What are… Source documents (6)

Sales order, purchase order, invoices, credit notes, debit notes, good received notes

What are the… Books of original entry (7)

Sales day book, Returns inward (sales) day book, Purchase day book, Returns outward (purchase) day book, Journal, Cash book, Petty cash book

What is an… Imprest system

Is a petty cash system which involves an agreed petty cash amount, say £100, which is maintained. The total float is replenished regularly up to the agreed amount by means of a cash payment from the bank account into petty cash

What is… Double entry

Double entry bookkeeping is the method by which a business records financial transactions. Every transaction is recorded twice so that every debit is balanced by a credit

What is a… Trial balance

This is a check on the arithmetical accuracy of the double entry and lists the balance on each account in a debit or credit column

What is… Carriage inwards

Purchases - Refers to the cost of transporting purchased goods from the supplier to the premises of the business which has bought them. The cost of carriage is usually added to the cost of purchases

What is… Carriage outwards

Sales - Is incurred when the business pays transport costs when delivering goods to customers. is a selling expense. The cost of carriage is a selling and distribution expense in the income statement and is not included in cost of sales

What is… Returns outwards

Purchases - Are goods which have been bought from a supplier and have been returned back to them

What is… Returns inwards

Sales - Are goods which have been sold by the business to a customer and have then been returned

What are… Drawings

Are the amounts (in the form of cash or other assets) that the owner has taken out of the business in the accounting period

What are… Discounts

A reduction in the amount owed for goods or services. There are two types of discounts: 1. Trade discount 2. Cash (settlement) also called prompt payment discount

What is… Discount Allowed

Sales - Customers - A reduction given for the amount owed for goods or services

What is… Discount Received

Purchases - Suppliers - A reduction received for the amount owed for goods or services

What is… A three column cash book

Contains an additional column for any discounts. Discounts allowed to customers, Discounts received from suppliers. The column is not part of the double entry but as a memorandum can be used for posting double entry

What is an… Accrual

An expense which is incurred during one accounting period but paid for in the next accounting period. Are expenses which are charged against the profit for a particular period, even though they have not yet been paid. DR Expense (IS) CR Accruals (SFP CL). Accruals/matching concept - income matched with expenses incurred to generate it. The journal will need reversing in the next period. Reverse will be DR Accrual CR Expense

What is a… Prepayment

An expense which has been paid in advance during the accounting period. Relates to future accounting period. Are payments which have been made in one accounting period, but should be changed to a later period. DR Prepayments (SFP CA) CR Expense. Accruals/matching concept - income matched with expenses incurred to generate it. The journal will need reversing in the next period. Reverse will be DR Expense CR Prepayment

What are… Bad debts

Are specific customer debts owed to a business which are never going to be paid. Are an expense. Is consistent with prudence concept. Are written off as an expense in the income statement. DR Bad Debts CR Receivable

What are… Bad debts Recovered

A debt written off in one period and paid in a later period. To record receipt DR Bank/Cash CR Bad Debts recoverable. At year end can choose to transfer to bad debts account DR Bad Debts recoverable CR Bad Debts

What are… Allowance for Receivables

An estimate of potential bad debts, which are provided for in final accounts. When created in first year DR Expense Allowance for Receivables (IS) CR Allowance for Receivables (SFP). Adjust in subsequent years, Increase DR IS CR SFP, Decrease DR SFP CR IS

What are… Inventories

Are assets held for sale by business, in process of production, materials, supplies to be consumed, include, stock, finished goods, work in progress

What are… Inventories Valued at

The lower of cost and realisable value

What is… Net Realisable Value

NRV = Estimated sale price minus estimated costs of completion (if damaged or incomplete) minus and costs of sale

What are… the methods of determining the purchasing cost of goods (5)

FIFO, LIFO, AVCO, Standard Cost, Retail method

What is… PPE

Plant, Property an Equipment, tangible, non current assets held by a business. Is an example of Capital expenditure. The double entry will be DR NCA (cost) CR Cash/Bank or payables

What is… IAS 16?

Property, plant and equipment, which includes additions, depreciation, revaluations, disposals

What are the… components of costs of PPE and Excluded costs

Purchase price, less trade discount or rebate, costs of dismantling and removing the item and restoring original site, directly attributable costs, site preparation, installation costs, professional fees. Administration and general overhead costs, start- up and similar pre-production costs, incidental expenses

What is… Subsequent expenditure

Improves (enhances) the condition of the asset e.g. increasing capacity or economic life, the expenditure is added to the carrying amount of the asset

What is the… Carrying amount

Another term for Net Book Value, the amount at which an asset is recognised after deducting accumulated depreciation

What is… Depreciation

The reduction in value of an asset over time due to wear and tear, obsolescence, or other factors. It's used to reflect the gradual loss of an asset's value and the cost of using it to generate income. Depreciation ensures that the accounting period bears the expense of utilising a non-current asset. Assets with a finite useful economic life (UEL) must be depreciated

What is the… Depreciable amount

Is the cost of an asset, or the amount substituted for cost (like a revalued amount in the financial statements), less its residual value

What should and should not be Depreciated

Assets that have an expected life of more than one accounting period., have a limited useful life, held for use in the production or supply of goods and services. Land has an unlimited life and is not normally depreciated. Double entry DR Depreciation Expense (IS) CR Accumulated depreciation (SFP)

What is the… Residual value

Is the estimated amount that an entity would obtain from disposal of the asset

What are… the two methods of depreciation

Straight line charges the same expensein each year of assets life, Reducing balance charges a fix percentage to the carrying value each year

What is a… Disposal

When an asset is permanently withdrawn from use, sold or scrapped, should be withdrawn from SFP. DR NCA Disposal A/c CR NCA cost A/c. also depreciation associated with it DR Accumulated depreciation A/c CR NCA Disposal A/c. Gains or losses are difference between estimated net disposal proceeds and carry amount of asset. Record sale DR Cash/Bank or Receivables CR NCA Disposal A/c. Balance off the Disposal A/c DR is a loss, CR is profit, these should be recognised as income or expense in IS

What are… Events after the reporting period

IAS 10 - Are those events favourable and unfavourable that occur between the reporting date and the date when the financial statements are authorised for issue

What are… Adjusting events

Events that provide evidence of conditions that existed at the reporting date. Must be reflected in the financial statement, normally without and disclosure by note

What are… Non adjusting events

Events that are indicative of conditions that arose after the reporting date but do not provide evidence of conditions. Must NOT be reflected in the financial statements, but material ones must be disclosed by Note if could affect economic decisions of users of financial statements