– Financial Accounting: Preparing Financial Statements

AAT's Code of Professional Ethics

Confidentiality. Integrity, Objectivity, Professional Behavior and Professional competence and due care

Confidentiality

to act, in accordance with the law, respect the confidentiality of information acquired as a result of professional and business relationships and not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships shall not be used for the personal advantage of the member or third parties

Integrity

to be straightforward and honest in all professional and business relationships

Objectivity

to not allow bias, conflict of interest or undue influence of others to override professional or business judgements

Professional behaviour:

to comply with relevant laws and regulations and avoid any conduct that discredits the profession

Professional competence and due care

to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A member shall act diligently and in accordance with applicable technical and professional standards when providing professional services.

Accounting equation (extended for capital)

Assets - liabilities = capital introduced + (income - expenses) - drawings.

Accounting principles

the overriding principles that are applied when preparing final accounts. Accruals Accounting, Business entity, Consistency, going concern materiality money measurement and Prudence

Accruals accounting

this depicts the effects of transactions in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period.

Business entity

this principle states that a business is separate from its owners, and therefore needs to keep separate records.

Consistency

refers to the use of the same methods for the same items, either from period to period within a reporting entity or in a single period across entities.

Going concern

the entity has neither the intention nor the need to enter liquidation or to cease trading. If such an intention or need exists, the financial statements may have to be prepared on a different basis

Materiality

all material information should be included in the final accounts. Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of users.

Money measurement:

This principle states that only transactions that can be measured in monetary terms should be recorded in the final accounts

Prudence

the exercise of caution when making judgements under conditions of uncertainty. The exercise of prudence means that assets and income are not overstated and liabilities and expenses are not understated. Equally, the exercise of prudence does not allow for the understatement of assets or income or the overstatement of liabilities or expenses

Accrued expense

an expense that has been incurred but not yet paid for or recorded in the accounts.

Accrued income

income that has been earned but not yet received or recorded in the accounts.

Accrued depreciation

the total amount of depreciation expense that has been recorded against an asset since it was acquired.

Appropriation account

an account that shows how the profit or loss of the partnership is shared amongst the partners.

Assets

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.

Authorisation:

processes that require certain expenditure to be approved by a suitably senior person within the organisation. For example, purchases of high-value non-current assets may need the authorisation of a senior manager.

Balance brought down

the balance of an account brought forward from the previous period.

Balance carried down

the balance of an account carried forward to the next period.

Bank statement

a record of all transactions in a bank account over a period

Capital

the residual interest in the assets of the entity after deducting all its liabilities. This balance represents the amount owed by the business to its owner(s). Alternative term: equity.

Capital expenditure:

expenditure on the purchase or improvement of non-current assets.

Capital injections

injections of cash or assets into the business by the owner

Carrying amount:

the cost of a non-current asset less its accumulated depreciation

Cash purchases

purchases paid for at the time of purchase

Cash sales

sales paid for at the time of the sale.

Commission paid to partners:

the amounts paid to partners based on their performance or sales. Like salaries, these commissions are treated as an appropriation of profits rather than an expense.

Control account

an account in the general ledger that summarises a set of subsidiary ledgers

Cost (of a non-current asset)

the original purchase price of a non-current asset plus any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended, and any estimated cost of dismantling and removing the item and restoring the site on which it is located.

Cost (of inventory)

the original purchase price of inventories plus any costs of conversion (direct labour and production overhead) and other costs incurred in bringing the inventories to their present location and condition.

Credit note

a document issued by a supplier to a customer, reducing the amount owed due to returns or errors.

Credit purchases

purchases paid for within an agreed period of time after the time of purchase. For example, 30 days.

Credit note

a document issued by a supplier to a customer, reducing the amount owed due to returns or errors

Credit purchases

purchases paid for within an agreed period of time after the time of purchase. For example, 30 days.

Credit sales

sales paid for within an agreed period of time after the time of sale. For example, 30 days.

Current assets

assets that a business expects to hold for less than one year

Current liabilities

obligations that a business expects to settle within one year.

Daybook

books of prime entry. They are the first place that transactions are recorded. The daybook totals are posted to the general ledger on a regular basis.

Sales daybook

credit sales.

Sales returns daybook

sales credit notes.

Purchases daybook:

credit purchases.

Purchases returns daybook:

purchase credit notes.

Discounts allowed daybook

prompt payment discounts that customers have taken.

Discounts received daybook

prompt payment discounts that have been taken from suppliers.

Cash book

payments in and out of the bank account. This may be split into a separate cash payments book and cash receipts book.

Petty cash book:

payments in and out of petty cash.

Journal:

journal entries.

Depreciable amount

the cost of a non-current asset less its residual value.

Depreciation charge

the amount of depreciation expense allocated to a specific accounting period.

Diminishing balance depreciation:

a depreciation method where the asset depreciates by a fixed percentage of its remaining carrying value each year.

Discounts allowed:

reductions in the amount owed by customers, offered by the business.

Discounts received

reductions in the amount owed by the business to suppliers

Double entry bookkeeping

a bookkeeping system in which every transaction is recorded in at least two accounts, with debits equalling credits, ensuring the accounting equation remains balanced.

Doubtful debts

debts that are considered unlikely to be collected.

General doubtful debts

an estimated amount of receivables that a business expects may not be collected, based on historical data and overall economic conditions.

Specific doubtful debts

identified amounts that a business expects may not be collected from particular customers.

Drawings:

withdrawals from the business by the owner for personal use. Drawings can be taken in the form of cash, goods or services.

Enhancing qualitative characteristics

the usefulness of financial information is enhanced if it has Comparability, Timeliness, Understandability and Verifiability

Comparability

it enables users to identify and understand similarities in, and differences among, items.

Timeliness

having information available to decision-makers in time to be capable of influencing their decisions.

Understandability:

classifying, characterising and presenting information clearly and concisely makes it understandable

Verifiability:

different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

Expenses

a business’s day-to-day running costs, along with other expenses such as depreciation and losses on the disposal of non-current assets

Financial statements

formal records of the financial performance and position of a business, typically including the statement of profit or loss and statement of financial position. Alternative term: final accounts, year end accounts.

Fundamental qualitative characteristics

if financial information is to be useful, it must have Faithful representation and Relevance

Faithful representation

it is complete, neutral and free from error.

Relevance

it is capable of making a difference in the decisions made by users. The information may have predictive value, meaning it can be used to predict future outcomes, or confirmatory value, meaning it can be used to confirm something that happened in the past.

Gain on disposal

when the proceeds from the disposal of a non-current asset are greater than its carrying amount

General ledger

the main ledger containing all the accounts of a business. The totals from the daybooks are recorded in the general ledger using double entry bookkeeping. Alternative terms: main ledger, nominal ledger.

Gross

the net amount and VAT added together. Alternative term: total.

Income

sales revenue is the income a business makes from its trading activities, but it may also have other income such as interest earned on savings and gains on the disposal of non-current assets.

Intangible assets

non-physical assets that cannot be touched or seen but have value.

Interest on capital

interest paid to partners on the capital they have invested in the partnership. It is usually calculated as a percentage of the capital balance.

Interest on drawings

interest charged to partners on the amounts they withdraw from the partnership for personal use. This interest is usually calculated as a percentage of the drawings for the period.

Irrecoverable debts:

debts that are unlikely to be collected.

Journal entry

a double-entry posting directly into the ledgers, which is often used for less frequent transactions such as depreciation, irrecoverable debts, year-end adjustments.

Ledger

a book or account in which accounting transactions are recorded.

Liabilities

a present obligation of the entity to transfer an economic resource as a result of past events

Loss on disposal

when the proceeds from the disposal of a non-current asset are less than its carrying amount.

Material misstatement

a misstatement that could reasonably be expected to influence the decision-making of users of the final accounts.

Net

the amount before any VAT has been added.

Net realisable value (NRV)

the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Non-current asset register

a record of all non-current assets held by the business, which usually contains details such as the purchase date, cost, depreciation, carrying amount, disposal date and disposal proceeds of each asset.

Non-current assets

assets that a business expects to hold for more than one year.

Non-current liabilities

: obligations that a business expects to settle after more than one year

Overstatement:

when the value of an accounting transaction, account or record is more than it should be

Part-exchange:

where a buyer trades in an old asset as part of the payment for a new asset.

Partner capital account

this account records the initial capital contributions and any additional capital injections made by the partners. It represents the long-term investment of each partner in the partnership.

Partner current account:

this account is used to record the ongoing transactions between the partners and the partnership, such as profit share, salaries, commissions, interest on capital, drawings and interest on drawings. It reflects the amount owed to or by each partner at any given time.

Payables ledger control account

the subsidiary ledgers showing the amounts owed by the business to each supplier. Alternative term: supplier accounts.

Petty cash

a small amount of cash kept on hand for minor expenses.

Petty cash voucher

a document used to record payments out of petty cash.

Prepaid expense:

an expense that has been paid for in advance for goods or services to be received in the future.

Prepaid income

income received in advance for goods or services that have not yet been delivered or performed. Alternative term: deferred income

Primary users of final accounts:

the key users who rely on the final accounts to make informed decisions: existing and potential investors, lenders and other creditors.

Professional scepticism

: an attitude that includes a questioning mind and a critical assessment of evidence.