Finance Revision Notes

Accounting Fundamentals

• Understanding that accounting involves more than just recording data; it requires making necessary adjustments based on business transactions.

Financial Statements Overview

• Income Statement: Tracks income and expenses over the financial year.

  • Financial year example: July 1 to June 30.

  • Analyzes profitability and operational efficiency by looking at actual transactions within the financial year.

• Balance Sheet: Breaks down the financial position into assets, liabilities, and equity.

  • Reflects the company's current operations and future viability (going concern).

  • Considers upcoming events such as asset sales or loan repayments within the next twelve months.

Key Concepts in Financial Statements

• Income Statement vs. Balance Sheet:

  • Income Statement includes only transactions for the current financial year.

  • Balance Sheet provides a snapshot of the business's overall financial health.

Key Accounting Transactions

• Accrued Income:

  • Money expected to be received that contributes positively to the financial position (classified as an asset).

• Accrued Expenses:

  • Outstanding payments for services or goods already received, affecting cash flow negatively (classified as a liability).

• Income Received in Advance:

  • Prepayments from clients for future services which require careful budget management, viewed as liabilities due to future service obligations.

• Prepaid Expenses:

  • Payments made for future expenses (like insurance), viewed as assets since they mitigate future liabilities.

Practical Examples of Transactions

• Accrued Income: If clients owe the business money, the business can collect it later, making it a positive asset.

• Accrued Expenses: Unpaid wages or bills that impact the cash flow and future budgeting, negatively classified as liabilities.

• Income Received in Advance: Requires careful tracking to avoid spending funds intended for future services.

  • Example: Cleaning services paid for the entire year in advance must allocate money across the year to avoid cash flow problems.

• Prepaid Expenses: Paying for a year's insurance upfront to avoid uninsurance risks, viewed positively as an asset.

Budgeting and Cash Flow Considerations

• When businesses receive payments in advance, it increases administrative duties to manage funds effectively across the service period.

• Debt collection and cash flow management are crucial to maintain a healthy financial position and ensure continued operations.