Accounting Technologies

What is a conceptual framework?

-Statement of principles which provide generally accepted guidance for the development of new reporting practices and for challenging and evaluating the existing practices which remain the same for a long time

-Used for financial statements identifying the needs of users and how they can be met

External reporting/financial accounting

When practices are developed for reporting for those who are not part of the day-to-day running of the business

Internal reporting/management accounting

For those who are managing the business on a day-to-day basis

Three types of business entity

-Sole trader

-Partnership

-Limited liability company

What is an entity and give an example

Entity definition is something that exists independently so a business entity is a business which exists independently of those who own the business 

What is a sole trader

Where only one person runs the business alone either by selling a good or providing a service so are sorely responsible so the business could be intertwined with their personal life

Disadvantages of sole trader

-Sole trader's business may be very much intertwined with their personal life.

-Risky as not protected

-Can be often difficult to grow as the sole trader could find it difficult to arrange additional financing for expansion

-If the business is not successful and the sole trade is unable to meet obligations to pay money to others than the court of law could authorise the sales of personal possessions like a home

Who needs accounting information of a sole trader business

-The bank for the purposes of lending money to the business or a person intending to buy the business when the existing owner retires.

-Government (in the form of HM Revenue and Customs) for tax collecting purposes.

What is a partnership business entity

Two or more people work together to form a business

Advantages of a partnership entity

-Permits a pooling of skills or may allow one person with ideas to work with another who has the money to provide the resources needed to turn the ideas into a profit increasing likelihood of success

What is joint and severe liability?

One partner may be required to meet all the obligations of the partnership if the other partner does not have sufficient personal property, possessions and cash.

What is a partnership deed?

A partnership deed is a document which sets out the rights and duties of each partner and specifies how they will share the profits they use this to resolve their disputes in court

What happens in partnership entity if sued but do not have money?

The consequences are similar to a sole trader where the court of law could sell personal property in order to meet obligations

Who needs accounting information of a partnership entity business

-HM Revenue and Customs

-Banks who provide finance

-Partners so they make sure they receive fair share of profit

Advantage of limited liability if business fails?

If the business fails then the owners might lose all the money they had put into the business but their personal wealth would be safe as law provides protection

Is personal property safe in partnership or sole-trader?

No

Forms of Limited Liability company

-A private limited company(ltd)

-A public limited company(plc)

Can a public limited company offer shares to the public?

No they are prohibited from doing this

Can a private limited company offer shares to the public?

Yes but have to satisfy more onerous(difficult) regulations

Where are shares sold?

Sold on the stock exchange

If a business flourishes what do owners receive?

Share of prosperity in the form of cash dividend

Who are the directors of a business?

People running the business ensuring that financial statements presented to them are presented in faithful representation of assets and liabilities of the business including transactions taken place.

How does a limited liability form?

Registration under the company’s act 2006

Memorandum and articles of association setting out the powers allowed to the company and shows which activities can be allowed in company

How many people is minimum in limited liability company?

2 (at least two members who take responsibility for compliance and statutory requirements)

In partnership or sole trader is accounting information required to the public?

No

In limited liability where should information for public be in?

Annual finance statement

Who runs the business in a limited liability company?

Directors appointed by the shareholders

In accounting equation what is of claim to business?

Ownership interest after all obligations have been satisfied

Asset definition

Resources controlled by the entity available to business as a result of past events which are expected to generate future economic benefits into the entity

Liability definition

Present Obligations to the entity to transfer economic resources arising from past events

Ownership interest definition

The owners of a  business claim to resources after all obligations have been satisfied 

What is accounting?

Process of identifying , measuring and communicating financial information to permit informed decisions and judgments by the users of the information

What is the use of management accounting for people inside the business?

Designed to help people make a decision

What is management accounting designed for?

People outside the business to make a decision

Is a business regarded as a separate economic entity as the sole trader?

Yes

Why are owners called shareholders?

As they share the ownership in good and bad times

When do business get cash dividend

If the business flourishes the owners might be able to receive a share of the prosperity in the form of cash dividend

How is a limited liability partnership different from normal partnership?

In Limited liability individual members do not have unlimited liability like they do in a partnership and owners are entrusted as investors who put their money in the company instead of having all information

Are assets and liabilities on the balance sheet?

Yes

Other word for ownership interest on the conceptual framework?

Equity

How can assets be measured on the financial statement?

By historical cost or fair value

What is historical cost?

Historical cost is the amount paid for an asset or agreed upon a liability on when the transaction / borrowing first occurred. Assets measured at date when they were acquired 

Current assets remain recorded at historical cost until they are used in operations of business or sold

How are non current(fixed) assets measured at historical cost?

Historical cost - depreciation

When are current assets not measured at historical cost

Used in operation of business or sold

What is fair value?

Fair value is the price that would be received to sell an asset or to transfer a liability in an orderly transaction between market participants at a measurement date. Taken at the end of the accounting period meaning that fair values change frequently

Non current assets are held for use in the business so their fair value can't be determined directly  by just selling them. Instead the reporting entity must estimate the fair value of an asset of similar type and condition. 

Current assets are used or sold within the reporting period. Value in market can be reported relatively easily

Which of non-current and current assets can be easily measured at fair value

Current as sold within reporting period so value reported more easily

Non-current held for use in business so fair value can’t be reported by directly selling them

Assets - Liabilities =

Ownership interest

What is trade receivable

-Asset which comes into business even though there is uncertainty whether they will pay for goods

-when good is sold to customer who is allowed time to pay becoming a debtor of business and amount is a trade receivable

What is an economic resource?

Right that can produce economic benefits

What does a future economic benefit mean?

Cash will be generated in the future

What does control mean for an asset

Control means the ability to obtain economic benefits restricting the access of others. Condition of control also included to prevent businesses from leaving out of balance sheet

What are past events important for transaction?

Past events finding some reasonable objective way of confirming that an entity has gained control of the resource as a transaction( agreement between two parties which usually involves exchanging goods or services for cash) is just the starting point  and sometimes no transaction but an event which is sufficient to give objective evidence 

Examples of assets

1. Land and buildings owned by the company which has an economic benefits of Used in continuing operations of the business, potential for sale of the item , controlled by entity of means of ownership and the past event is signing the contract as evidence of land and buildings 

2. Buildings leased (rented) by the company on a 50-year lease which has economic benefits : Used in continuing operations of the business; potential for sale in item Controlled by contract for exclusive use as tenant and past event is  purchase of plant and equipment, evidenced by receiving the goods and a supplier's invoice.

3. Raw materials owned by the business

4. Advertising campaign taken by the business

5. 3. Plant and equipment owned by the company on a 50-year old lease which has an economic benefits: Used in continuing operations of the business , controlled by the entity by means of ownership and past event is Purchase of plant and equipment, evidenced by receiving the goods and a supplier's invoice.

   4. Equipment used under a finance lease which has economic benefits:Used in continuing operations of the business. Controlled by entity by means of contract for exclusive use and past event is signing lease agreeing rental terms 

   5.Vehicles owned by the company has economic benefits: used by continuing operations of business controlled by entity by means of ownership and past event 

Why isn’t the workforce an example of an asset?

Workforce isn’t certain because there is not a guarantee of cash for company or certain for future benefits

When should something be recognised as an asset on balance sheet?

It is probable that future economic benefits will flow into the entity which can be measured accurately

Meets the definition of an asset, resulting information provides a faithful representation and benefits of providing it exceed costs of providing it

Examples of indications that recognition might not provide relevant information about an asset?

-Range of possible outcomes is extremely wide and likelihood is difficult to estimate 

-Identifying resource is difficult

-Measuring a resource unusually difficult or exceptionally subjective allocations of cash flow that do not relate sorely to the item being measured

Items which pass the definition of an asset but do not appear on the balance sheet?

Workforce of business, strength of management team, reputation established for quality of product, quality of regular customers and tax refund which will be claimed after two years time

All these items have a high level of uncertainty. Range of possible outcomes is extremely wide and likelihood is hard to estimate. Workforce as a whole might be reliable and predictable but unexpected circumstances can come to all like illness and death or could leave which could have serious impact on perceived value of  business

Reasons why some items pass the definition of an asset but are not on balance sheet?

If there is a high level of uncertainty

Why is a bank loan an obligation?

Obligation in the future to pay cash

What is a trade creditor?

When money is owed to someone they are a creditor and if no doubt about the amount of money owed and the date due the person is a trade creditor

What is amount due for trade creditors

Trade payable which is an liability

What is a present obligation for liability?

Present Obligation duty or responsibility that an entity has no practical knowledge to avoid as it is a legal obligation is evidence that the liability exists because another person has a legal claim to payment. Most liabilities exist either by contract or statue law. However legal obligation is not a necessary condition

Is legal obligation a necessary condition?

No

How do most liabilities exist?

Contract or statue law

3 criteria’s of liabilities

• present Obligation past events and outflow embodying economic benefits so cash or other resources leave business

Examples of liabilities

Bank loans and overdrafts , trade payables( amount due to suppliers for goods and services on credit) , taxation payable, accruals( amount owing,such as unpaid expenses) provision for deferred taxing and long term loans 

Why are trade payables, overdrafts and bank loans current liabilities?

as they will become due within one year of the date of the financial statements 

What are accruals?

Amount owing such as unpaid expenses

What are non-current liabilities?

Liabilities that will remain in the business longer than a year

Examples of non-current liabilities

Deferred taxing and long term loans

What can help confirm a liability?

subsequent events may help confirm its existence at the date of the financial statements 

What are current liabilities

Due within one year of date of financial statements

When is a liability recognised in the balance sheet

when its meets the definition of liability, resulting information is relevant and provides faithful representation and benefit of information exceeds costs of providing it.

Why are liabilities harder to recognise?

Because the range of possible outcomes is wide and likelihood of each outcome is difficult to estimate , resource to be transferred could be difficult , liability exists but low probability of transfer of economic goods and measuring cash flows requires difficult or extremely subjective allocations of cash flow 

What might an item which fails the recognition test be reported as?

Contingent liability where it doesn’t exist now but is highly likely in future

Examples of liabilities not on balance sheet

A commitment to buy machinery next year and a guarantee to support a bank overdraft of another company where there is little likelihood of being called upon to meet the guarantee  in these examples we see the commitment to buy is not legally binding so the outflow of resources may not occur and so outflow of resources may not occur and in the bank example

What are historical cost of liabilities

Liabilities have been measured at the amount agreeing as owing on the date borrowing took place.

When are current liabilities not measured at historical cost?

Until they are paid or settled.

Are non-current liabilities measured at historical cost throughout their life?

Yes

What is fair value of a liability?

The price that would transfer a liability in an orderly transaction

What are net assets

The difference between the total assets and total liabilities so represents the ownership interest

Assets - Liabilities at the end of the period =

Ownership interest at the start of period + capital contributed/withdrawn + income of period - expenses of period 

Definition of ownership interest

Residual amount found by reducing all of entities liabilities from entities assets

What is income statement for?

Financial performance

What is primary financial statement purpose?

To report

Why might the owners have ordinary shares?

They entitle them to a share of the dividend and a share of net assets on the closing down of the business depending on the number of shares held

Is there recognition of ownership interest?

No separate recognition criteria as totally dependent on recognition of assets and liabilities

What is profit

Revenue- expenses

What is revenue?

Income rising in the course of the entities ordinary activities which cause an increase in ownership interest

What is an expense

Transaction or event arising from the entity’s ordinary activities which cause a decrease in ownership interest

What’s an increase in ownership interest

Revenue

How might ownership interest be increased by?

earning revenue and new capital contributed by the owner so money put in

What are lenders interested in?

Lenders are interested in information that allows them to know whether their loan and related interest will be paid when due.

What are loan creditors?

Loan creditors provide finance on a longer term basis by assessing the economic position of the borrower 

Do trade creditors have little protection if an entity fails?

Yes as all liabilities might not be able to be met these are classified as unsecured creditors meaning they have extra caution to see if business is able to pay and how much risk of non-payment 

How many aspects are there to every transaction?

At least two

Where are double entry bookkeeping records kept in?

Ledger accounts

What happens in a debit

Assets increase , Liabilities decrease and ownership interest decreases in Debit entries for ledgers account, trade receivable Deal increase in drawings so cash, expenses(Purchases, cost of sales, rent, wages of salaries, depreciation, heat and light),  assets(VAT, accrued income , fixed assets ,Bank , trade debtor, prepayments and stock) losses(net loss, loss on sale and retained loss) 

What happens in a credit

Assets decrease , Liabilities increase and ownership interest increases in Credits entries for ledgers account, trade payable

CLIP Capital(Cash, investment), liabilities(Trade creditors, VAT, lease creditors, loan creditors  and deferred income) income( sales, other income and grant income) and profit(retained profit, net profit and profit on a sale) as these increases it is credit