Lecture 1 - Intro to Accounting

Flashcards Lecture 1

What is the definition of Accounting

Collecting, analysing and communicating financial information.

− The ultimate aim of accounting is to help those using accounting information to make more informed decisions

Who are the main users of Financial information relating to a business?

Owners		Customers	Competitors
Managers Lenders		Business	Employees and their representatives covernment
Suppliers		Investment analysts	Community representatives.

What are the two main branches of accounting

Financial Accounting and Management Accounting

What is Financial accounting

Recording, summarising, analysing and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public and private use.

What are the 3 main financial statements

− The main financial statements:

• Statement of financial position (balance sheet)

• Income statement

• Statement of cash flows

What is the balance sheet/statement of financial position

Provides information on what the business is worth from a book value perspective at a particular point in time. It reports the assets of a business and the claims on those assets (liabilities and owners’ equity) at a particular point in time.

It is a snapshot of a company's financial position, detailing its assets, liabilities, and equity, enabling stakeholders to assess its financial health.

What is the income statement?

Measures and reports the profit (or loss) a business during a particular period. Comes by identifying the total revenue for a period and deducting the total expenses associated with that revenue.

What is the statement of cash flows?

Shows a business’s sources and uses of cash (the cash movement) for a particular period.

What is Management Accounting?

Preparing reports about business operations for management to help planning, control and decision making (i.e., information to help run the business).

What are the difference between Financial Accounting vs Management Accounting?

	Management accounting	Financial accounting
Nature of the reports produced	Tend to be specific purpose	Tend to be general purpose
Level of detail	Often very detailed	Usually broad overview
Regulations	Unregulated	Usually subject to accounting regulation
Reporting interval	As short as required by managers	Usually annual or bi-annual
Time orientation	Often based on projected future information as well as past information	Almost always historical
Range and quality of information	Tends to contain financial and non-financial information, often uses non-verifiable information	A focus on financial information with emphasis on objective, verifiable evidence.

What is Finance (Financial management)?

The ways funds for a business are raised and invested

What 3 important decisions effect finance deals?

• Financing decisions/capital structure

• Capital investment decisions/capital budgeting

• Working capital management/liquidity decisions.

In short: Financing, Investment and Liquidity

What is Financing Decisions/Capital Structure

Decisions on how to optimally finance the capital investments through the business’s equity, debt or a mix of both.

Often the question asked around this is : Where is the money coming from?

• Equity (e.g., shares and retained earnings)

• Debt (e.g., loans)

What is Capital investment decisions/capital budgeting?

Planning and managing a business’s long-term investments .

What type of investment?

Examples:

Land

Machinery

Labour

IT

R&D

What are Liquidity decisions/working capital management?

Day-to-day activity which ensures that the business has sufficient resources to continue its operations and avoid costly interruptions

Working capital refers to a firm’s short-term assets and liabilities.

Working capital = Current assets − Current liabilities

Working capital management aims at more efficient use of the business’s resources by monitoring and optimising the use of current assets and current liabilities.

What are the 3 types of business ownership

Sole Traders

Partnerships

Limited Companies

What is a sole trader?

Business owned and controlled by one individual who is personally responsible for all aspects of the business.

Owner keeps all the profits but also carries unlimited liability, meaning there is no legal distinction between personal and business assets

− Examples: a local shop, plumber, or freelance consultant

What is a Partnership?

Business owned and operated by two or more individuals who share profits, losses, and responsibilities. Each partner contributes capital, skills, or expertise, and unless it is a Limited Liability Partnership (LLP), partners have unlimited liability for the debts of the business.

What is a Limited Company?

Business that is granted a separate legal existence from that of its owners. The owners of this type of business are liable for debts only up to the amount that they have agreed to invest.

Examples: small or large limited companies

Advantages of being a Sole trader

• Simple and low-cost to set up

• Full control over business decisions

• Owner keeps all profits and owns the assets

• Fewer reporting and legal requirements

• No requirement to publish accounts or have an audit

• Flexible and easy to manage

Disadvantages of being a Sole trader

• Unlimited liability – owner is personally responsible for all debts

• Personal assets may be at risk

• Limited access to finance and capital

• Owner may face long working hours with no employee benefits

• Business continuity may be affected by the owner’s illness or death

Advantages of being in a Partnership

• Fewer reporting requirements; no public accounts or audit (unless Limited Liability Partnership (LLP))

• More capital can be raised from multiple partners

• Roles, responsibilities and skills can be shared

• Risks and losses are shared between partners

• No company tax; profits are taxed through individual partners

Disadvantages of being in a Partnership

• Unlimited liability – partners are personally liable for business debts (unless LLP)

• Costs involved in setting up a partnership agreement

• Business continuity may be affected by a partner’s death or illness

• Decision-making can be slower due to the need for agreement

• Partnership may dissolve if a partner leaves, unless agreed otherwise

Advanatges of having a Limited Company

• Limited liability – reduces the financial risk for shareholders

• Easier to raise finance through selling shares

• No limit on the number of shareholders

• Separate legal entity – business continues regardless of changes in ownership

• Potential tax advantages compared with personal taxation

• Shares can be transferred relatively easily

Disadvanatges of having a Limited Company

• Annual financial statements must be published publicly

• Financial statements must follow legal and accounting requirements

• Larger companies may require an independent audit, which can be costly and time-consuming

• Share issues and changes to share capital are regulated by law

• Less flexibility over raising or reducing capital compared with sole traders and partnerships

Concept of business entity

For accounting purpose, all three entities are treated as separate from their owners. This is called the business entity concept.

− When considering a limited liability company, this distinction is laid down in law – the company has a separate leal identity.

What is Governance in Limited Companies

A board of directors is appointed by owners (shareholders) to oversee the running of the business.

− The board of directors represents the most senior level of management.

− Each board has a chair, elected by directors, who is responsible for running the board.

− Each board has a chief executive officer (CEO) who is responsible for running the business on day-to-day basis.

What are the tasks of the board of a company?

• Setting the overall direction and strategy for the business

• Monitoring and controlling the activities of the business

• Communicating with shareholders and other connected with the business

What is Corporate Governance?

• The corporate governance codes set out how a company should be directed and controlled.

• It is important as shareholders are divorced from daily management.

• Corporate governance promotes transparency, accountability, and fairness, ensuring directors act in

shareholders’ best interests