BS1209 Lecture Notes

Introduction to Financial and Management Accounting BS1209

• Joint Module Leaders:
  • Christopher Bourn FCCA (Financial Accounting Lectures 1 to 4)
  • Guangyu Li (Management Accounting Lectures 5 to 8)
• Office hours: See Moodle: Meet your Module Leaders Section 1

Lecture Topics

• Lecture 1: The Basic Accounting Equation
• Lecture 2: Adjustments to Financial Statements
• Lecture 3: Financial Statements of Limited Companies
• Lecture 4: Statement of Cash Flows
• Lecture 5: Cost Classification and Cost Behavior
• Lecture 6: Cost Volume – Profit Analysis
• Lecture 7: Full Absorption Costing and Marginal Costing
• Lecture 8: Budgeting
• Financial Accounting (Lectures 1-4)
• Management Accounting (Lectures 5-8)

BS1209 - Programme & Reading

• Financial Accounting Lectures:
  • Lecture 1: The Basic Accounting Equation
    • Lecturer: CB
    • Reading: Chapters 1&2 Financial Accounting for Decision Makers, Atrill and McLaney
  • Lecture 2: Adjustments to Financial Statements
    • Lecturer: CB
    • Reading: Chapter 3 Financial Accounting for Decision Makers, Atrill and McLaney
  • Lecture 3: Limited Company Financial Statements
    • Lecturer: CB
    • Reading: Chapters 3&4 Financial Accounting for Decision Makers, Atrill and McLaney
  • Lecture 4: Cash Flow Statements
    • Lecturer: CB
    • Reading: Chapter 6 Financial Accounting for Decision Makers, Atrill and McLaney
  • Reading Week - No Lectures
• Management Accounting Lectures:
  • Lecture 5: Cost Classification & Cost Behaviour
    • Lecturer: GL
    • Reading: Chapters 2&3 Management Accounting for Decision Makers, Atrill and McLaney
  • Lecture 6: Cost Volume Profit Analysis
    • Lecturer: GL
    • Reading: Chapter 3 Management Accounting for Decision Makers, Atrill and McLaney
  • Lecture 7: Full Absorption Costing & Marginal Costing
    • Lecturer: GL
    • Reading: Chapters 3&4 Management Accounting for Decision Makers, Atrill and McLaney
  • Lecture 8: Budgeting
    • Lecturer: GL
    • Reading: Chapters 6 Management Accounting for Decision Makers, Atrill and McLaney
  • Lecture 9: Term Test Multiple Choice (Online) - Contents of Lectures 1 to 8
    • Online exam during lecture time details TBC
    • Lecturers: CB&GL
  • Lecture 10: Revision & Review (For Final Exam)
    • Lecturers: CB&GL

Lectures and Tutorials

• Lectures:
  • Two-hour lecture per week
  • Introduction to techniques in financial and management accounting.
  • A series of examples presented by and solved with lecturer support.
• Tutorials:
  • One-hour tutorial per week, in the week following the lecture content
  • Requirement: complete the relevant tutorial questions BEFORE the tutorial session.
  • Tutorial questions can be found on Moodle.
  • Tutorial solutions will be posted on Moodle at the end of the week’s tutorials.

Moodle

• The Moodle BS1209 webpage is used throughout the course for:
  • Lecture slides, tutorial questions and solutions.
  • Announcements about the module.
  • Discussion Forum.
  • Information about the multiple choice online test, test examples
  • Information about the final written exam and final exam example

End of Term Test (20% of final grade)

• One end of term test:
  • Lecture 9 (Online Replacement) Covering Lectures 1-4 (financial accounting) and Lectures 5-8 (management accounting).
  • The test is a multiple-choice test.
  • The test accounts for 20% of module’s overall mark.

Final Exam (80% of final grade)

• The final exam will be composed by written/essay questions which require calculations.
• Covering all lectures 1 to 4 and 5 to 8, both financial & management accounting included. (NO MULTIPLE CHOICE)
• Accounts for 80% of overall module mark.
• The combine pass mark for the module is 40%.
• More guidance about the content and format will be given during the revision lecture 10.

Self-study responsibility

• Accounting requires regular practice and study.
• In addition to attending weekly lectures and tutorials please:
  • Complete the weekly tutorial homework BEFORE attending the tutorial sessions.

Suggested Readings (Reference Textbooks)

• Financial Accounting for Decision Makers, 10th Edition by Atrill and McLaney.
• Management Accounting for Decision Makers, 11th Edition by Atrill and McLaney.

Required Textbooks

• Financial Accounting for Decision Makers, 10e by Peter Atrill & Eddie McLaney
• Management Accounting for Decision Makers, 11e by Peter Atrill & Eddie McLaney

Discount Codes

• Get 15% off for the e-textbook using the code: BTU15-24-7133
• Get 20% off for the printed book using the code: PRINT20-LG2N-BTU24
• Discount code expires 31/07/2025

Lecture 1: The Basic Accounting Equation

• Agenda:
  • What is Accounting?
  • Accounting Qualities.
  • Accounting Items.
  • The Accounting Equation.
  • Income Statement (definition and format).
  • Double entry bookkeeping and accounting entries.
  • Trial Balance (definition and creation).

What is Accounting?

• The identifying, measuring and communicating of economic information to permit informed judgements and decisions by users of the information (The American Accounting Association).
• Identify, collect, measure, analyze and communicate financial information.
• Such information is used for business decision making, planning and controlling a business.
• An understanding of accounting requires an awareness of the users of accounting information.

Users of Accounting Information

• Main users of financial information relating to a business:
  • Competitors
  • Lenders
  • Managers
  • Suppliers
  • Investment analysts
  • Community representatives
  • Government
  • Employees and their representatives
  • Owners
  • Customers

Financial Accounts vs. Management Accounts

• Some users are internal and others are external to the organisation.
• Organisations prepare two sets of accounts:
  • Financial accounting for external users.
  • Management accounting for internal users.
• Why do organisations prepare two sets of accounts for the two user groups?

Financial Information

• Financial information refers to actual transactions undertaken by organisations (e.g., payment of salaries, rent, sale of goods, purchase of stock).
  • These transactions are recorded in the books of Prime Entry - Cash Book, Sales Journals, Purchase Journals
  • Transactions are analysed in the books of prime entry and posted to Ledger Accounts - Purchase Ledger, Sales Ledger, General/Nominal Ledger
  • Transactions are then summarised in Financial Reports.
• Is the business profitable?
• What does the business owe, what is it owed?

Financial Reports

• The main financial statements produced by an organisation are:
  • Statement of Financial Position (balance sheet): A statement of assets owned and liabilities owed by the business at a certain date.
  • Income Statement (profit and loss account): Records the income earned and expenses incurred over a period of time (generated wealth).
  • Cash Flow Statement: Records the movement of cash over a period of time (accumulated wealth).
  • Statement of changes in equity.
  • Notes.
• IAS 1 (Presentation of Financial Statements) and IAS 7 (Statement of Cash Flows) outline the format for these.

Steps in Producing Financial Reports

• Record all the financial transactions in books of prime entry
• Post the transactions to ledger accounts
• Summarise the balances from the General Ledger Account
• Produce a Trial Balance
• Identify any journal adjustments to be made after producing the trial balance
• Construct the Income Statement and the Statement of Financial Position using the trial balance and journal adjustments
• Use the Income Statement and Statement of Financial Position (at start and end of year) to produce the Cash Flow Statement

Accounting Qualities

• Make accounting information useful:
  • Relevance
  • Materiality
  • Faithful representation
• Enhance the usefulness of accounting information:
  • Comparability/Consistency
  • Verifiability
  • Timeliness
  • Understandability

Detailed Explanation of Accounting Qualities

1. Relevance: Information that is timely, useful, has predictive value, and will make a difference to a decision maker.
2. Materiality: An accounting standard can be ignored if the net impact of doing so has a small impact on the financial statements that a user would not be misled.
3. Faithful Representation: Financial statements accurately reflect the condition of a business.
4. Comparability/Consistency
5. Verifiability
6. Timeliness
7. Understandability

Accounting Items

• Assets: Resources owned by a business.
  • Non-current assets: buildings, transportation.
  • Current assets: trade receivables, inventory.
• Liabilities: Amount owed to third parties (obligations).
  • Non-current liabilities: long-term debt.
  • Current liabilities: trade payables, short-term debt.
• Equity: Investment that the owner makes and is owed back to the owner.

Assets

• Goods, rights, and other resources controlled by the company as a result of past events and from which future economic benefits are expected to flow to the company.

Liabilities

• Present obligations of the company arising from past events, the settlement of which is expected to result in an outflow of resources from the company embodying future economic benefits.

Equity

• The residual interest in the assets of the company after deducting all its liabilities.
• Equity includes contributions made by equity holders or owners upon incorporation of the company or subsequently that are not considered as liabilities, as well as retained earnings and cumulative losses or other related variations.

The Accounting Equation

• The accounting equation presents the resources of the business and the claims to those resources.
• Economic Resources = Claims to Economic Resources
• Assets = Liabilities + Owners’ Equity
• ASSETS = Liabilities + Equity

Example: Bourn Ltd Statement of Financial Position

• Statement of Financial Position as at 30th June 2024

• Business Entity Owns - Assets
• Owes
  • Equity – Amount introduced by the owners.
  • Liability – Loans, payables.

Example 1

• Company X receives £5,000 in cash from an investor who provides capital to the company.
• There is a twofold effect:
  1. The business has an asset (cash) of £5,000.
  2. The business owes to the investor £5,000 (Equity).
• ASSETS (£5,000) = Liabilities (0) + Equity (£5,000)

Example 2

• The business borrows £1,000 from a bank.
• There is a twofold effect:
  1. The business has an additional asset (cash) of £1,000.
  2. The business owes the bank (liability) £1,000.
• ASSETS (£1,000) = Liabilities (£1,000) + Equity (0)

Combining Examples 1 and 2

• The accounting equation of the business is:
• Assets = Equity + Liability
• Assets £6,000 = Equity £5,000 + Liability £1,000

Example 3

• The business acquires £1,500 of goods using cash.
• Assets: Inventory £1,500, Cash £4,500 = Equity £5,000 + Liability £1,000
• Cash = £6,000 – £1,500 = £4,500
• Assets increase and decrease

Example 4

• The business acquires £500 of goods using credit.
• Assets: Inventory £2,000, Cash £4,500 = Equity £5,000 + Liability: Trade Payable £500, Loan £1,000
• Assets increase, Liabilities increase

The Income Statement

• The purpose of the income statement (profit and loss account) is to measure and report how much profit or loss the business generated over an accounting period.
• Profit = Total revenue for period - Total expenses incurred in generating the revenue

Key Terms

• Revenue: inflow of economic benefits from ordinary activities.
  • Examples: sales of goods, sales of services.
• Expenses: outflow of economic benefits arising from ordinary activities.
  • Examples: salaries, rent, rates, electricity, water.

Examples of Revenues, Expenses, Assets, and Liabilities

Example: Bourn Ltd Income Statement

• Income Statement for the year ending 30th June 2024

Income Statement and Statement of Financial Position

• Accounting Period: usually 12 months; it does not need to coincide with the calendar year.
• The statement of financial position is a snapshot at a point in time at the end of the accounting period (e.g., 30/06/2020).
• The income statement links the statements of financial position between two periods.
• Opening Position (Statement of financial position as at 30/06/2019) + Income statement (for the year 01/07/2019 to 30/06/2020) = Closing Position (Statement of financial position as at 30/06/2020)

Double Entry Bookkeeping

• A system known as double-entry bookkeeping is used to record the financial transactions of a business.
• Most systems today are computerised and use accounting packages but follow the same principles as manual systems.
• Based on the Dual Aspect convention - every transaction has at least two effects – hence the name “double entry”.
• Accounting systems are structured in such a way (with debits and credits) which allows the two-sided nature of entries to be recorded.
• These accounts are kept in books known as ledgers (journal entries).

The Extended Accounting Equation

• The basic accounting equation can be extended to incorporate any profit/loss transactions and stated as follows:
• Basic Accounting Equation:
  • Assets = Liabilities + Equity
• Extended Accounting Equation:
  • Assets = Liabilities + Opening Equity + (Revenue – Expenses)
  • Assets + Expenses = Liabilities + Equity + Revenue

Accounting Entries

• Assets + Expenses
  • DEBIT (Increase)
  • CREDIT (Decrease)
• = Equity + Revenue + Liabilities
  • CREDIT (Increase)
  • DEBIT (Decrease)

Example 1 Revisited

• Company X receives £5,000 in cash from an investor who provides capital to the company.
• There is a twofold effect:
  1. The business has an asset (cash) of £5,000. Asset increase = debit
  2. The business owes to the investor £5,000 (Equity). Equity increase = credit
• Journal Entry:
  • DEBIT: Cash 5,000
  • CREDIT: Capital 5,000

Balancing Accounts

• During any period, some accounts will contain several entries.
• Some will contain mainly debits, some mainly credits, and others a mixture.
• At regular intervals, the balance on each account is calculated to ascertain a business’s position and performance.

Balancing Accounts - Cash Account Example

• The balance on each account is calculated as the result of the T-account belonging to each account.
• From Examples 1, 2, 3, and 4, we had the following information (we concentrate on the cash account):
  1. Company X receives £5,000 in cash from an investor: Debit Cash, Credit Share Capital
  2. Company X borrows £1,000 from a bank: Debit Cash, Credit Loan
  3. Company X acquires £1,500 of goods on cash: Credit Cash, Debit Stock
  4. Company X acquires £500 of goods on credit: no cash movement Debit Stock, Credit Creditors
• Cash T-Account:
  • Debit:
    • 5,000
    • 1,000
  • Credit:
    • 1,500
  • Balance: (5,000 + 1,000) – (1,500) = 4,500
• This balance result is the amount that will go to the Statement of Financial Position for Cash and the amount that goes to the Trial Balance.

The Trial Balance

• Once all the accounts have been balanced off, a Trial Balance is extracted.
• A trial balance is a list of all the debit and credit balances from the T-Accounts.
• The total of the debit balances should equal the total of the credit balances if double-entry book-keeping procedures have been carried out correctly.
• It is a convenient method of checking that all the transactions have been entered correctly.

Trial Balance Confirmation

A Trial Balance confirms that:

• For every debit entry, there is a credit entry - dual aspect concept.
• The amount for each debit and credit entry has been entered correctly in appropriate accounts.
• The balance on each account has been calculated, extracted, and entered correctly in the trial balance.
• The debit and credit columns in the trial balance sum the same amount.

Trial Balance – Example 1

Example 1 Solution

Trial Balance – Example 2

• Produce a Trial Balance for Bourn Ltd from the following list of accounts balances:

Example 2 Solution

• Bourn Ltd Trial Balance As at 31st December 2024

Errors Not Disclosed by the Trial Balance

1. Omission: When a transaction is completely omitted.
2. Wrong account
   • When the amount is included in the wrong account (e.g., purchases instead of electricity).
   • When the amount is included in the correct type of account but wrong personal account.
3. Compensation: When there are identical addition errors in the debit and credit columns of two accounts – one cancelling the other (including the amount of £40 instead of £4,000).

Suggested Reading

• Chapters 1 and 2, Financial Accounting for Decision Makers, Atrill and McLaney, (10th edition).