introduction to accounting and finance

accounting

a system of collecting, processing and communicating information about economic activities of individuals and organisations

accounting’s functions:

• summarises numerical data relating to past events

• presents this info to managers and other interested parties

• is a basis for decision-making and control purposes

consolidated accounts

a company owns over 50% but still two separate legal identities

fiduciary duty

duty to others interests, not yours

examples of decisions made using accounting information

• production levels

• cost of production and services provision

• selling prices

• number of employees needed to meet sales targets

• staffing costs and income generated per employee

• expansion and outsourcing plans

• financing future business

management accounting

reports info to users inside the organisation to aid in decision making, so focuses on the present and future rather than past

• concerned with costing of products and services, and setting correct prices to generate profit

characteristics accounting information should have:

• relevance - ability to affect users economic decisions

• reliability

  ^{«FUNDAMENTAL qualitative characteristics}

• comparability - should be comparable over time

• understandability - represented so users can understand

• materiality

• cost v benefit

limitations of accounting information:

• doesn’t measure quality of performance

• focuses on results, not how they were achieved

• ignores external effects of a firms operations

• doesn’t produce a valuation of a firms capital

• can be manipulated

• not everything that counts can be counted

why is accounting information relevant?

• used by everyone in an organisation

• foundation of all business decisions

• accounting-based performance measures are a basis of employee compensation - its the language of business

without accounting you wouldnt be able to:

• communicate fully with other members of organisation

• draw up future financial plans

• understanding accounting reports put in front of you

• prepare simple reports to evaluate performance and outcomes

• understand financial effects of decisions made

• check and evaluate accuracy of what youre being told

SOFP is a summary of:

• assets an organisation controls

• liabilities an organisation owes to outside parties

• equity attributable to business owners

• it gives a snapshot of a business position at a particular point in time

economic resource

a right that has the potential to produce economic benefits

assets

a present economic resource controlled by the entity as a result of past events

• business owns it AT THE TIME and will be used to generate profit

non-current assets

assets that are held for long-term use to produce goods or services, not purchased for resale in the normal course of business and retained in business for more than a year

current assets

assets that are held for short-term, for sale or consumption in the normal course of business e.g. cash

liabilities

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

non-current liabilities

due for settlement in more than 12 months

current liabilities

due for settlement over course of next 12 months

equity

the residual interest in the assets of the entity after deducting all liabilities (also known as capital), must be equal to net assets

equity consists of:

• resources put into business by owner (share capital, own money)

• profit or losses generated by business

• amounts taken out of business by the owner (drawings, dividends)

what doesnt SOFP show?

• items that dont meet definition of asset, liability or equity

• monetary value a third party would be willing to pay for an entity

historic cost convention

all assets and liabilities are valued at their original cost

fair value

the amount at which an asset or liability could be sold or settled in the open market

the duality principle

each transaction will affect at least two balances listed in a SOFP, the accounting equation must still hold after transaction is recorded