1. Financial Accounting

2. What is accounting?
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information
Accounting provides the key source of information about a business to those who need it - owners/shareholders, managers, other stakeholder

3. Accounting Accounting is
a system that identifies, records and communicates information that is relevant, reliable and comparable to help user make better decisions
a classification and recording of monetary transactions
presentation and interpretation of the results of those transactions in order to assess performance

4. Financial accounting
The classification and recording of all the monetary transactions of an entity in accordance with established concepts principles, accounting standards and legal requirements and their presentation, by means of profit and loss accounts, balance sheets and cash flow statements, during and at the end of an accounting period. (CIMA)
The recording and presentation of business transactions in order to supply information to the owners of a business on the performance of their investment

5. The stewardship function
Financial accounts are prepared to reassure the providers of finance that the financial resources they have provided are safe and that they are being used wisely
Stewards (i.e. directors) have a obligation to provide relevant and reliable financial information relating to resources over which they have control but which are owned by others (i.e. shareholders)
If the providers of finance feel that their investment is unsafe they will withdraw the finance they have provided

6. Reporting to stakeholders
Financial accounts are prepared for shareholders- the owners of the business
But they are of interest to other stakeholders:
potential shareholders
creditors and potential creditors
the government
employees
customers
suppliers
the community

7. Basic purpose of financial accounting
To keep a record of all financial events that have taken place in the business as and when then happen
To record and classify information extracted from basic books of accounts
To summarise what has happened - collecting and recording information about financial events that have taken place
To provide a means of interpreting and analysing the information
To present financial statements to shareholders and other stakeholders

8. Financial statements
The objective of financial statements is to provide information about the financial position, performance and change in financial position of an enterprise that is useful to a wide range of users in making economic decisions. (International Accounting Standards Board)
The key statements are
profit and loss account
balance sheet
cash flow statement (not to be confused with a cash flow budget)

9. Financial accounts Financial accounts
are largely based on historic information
provide an analysis for evaluation of performance
record all the financial transactions that have taken place
classify transactions into major headings
summarise all the transactions into final accounts
ensure that the accounts show a true and fair view

10. A true and fair view
Company law requires that financial statements provide a true and fair view
This is generally taken to mean that the accounts are prepared to inform and not to mislead the user
The accounts should provide a fair impression of the company and the results of its activities
To provide a true and fair view accounts must conform to various accounting concepts, conventions, policies and standards
The accounts must also be prepared in accordance with company law

11. Concepts, standards and policies
Accounting concepts - principles that underpin the preparation of accounting information
Accounting standards - rules that business must follow to give a true and fair view when drawing up accounts
Accounting polices - the specific methods selected and followed by a company in areas (such as stock valuation, depreciation) where some flexibility is allowed.

12. The regulatory framework
The regulatory framework provides a set of rules and regulations which govern accounting practices
In the UK the main sources of regulation are the Companies Act and accounting standards
Accounting standards are rules applied in accounting practice that have been recommended by the Accounting Standards Board
They were previously known as Statements of Standard Accounting Practice (SSAP) but are now called Financial Reporting Standards (FRS)

13. Accounting standards These are defined as
accounting pronouncements which must be followed in order to give a true and fair view within the regulations
authoritative statements of how particular types of transactions and other events should be reflected in financial statements
Compliance with accounting standards is necessary if financial statements are to give a true and fair view.
Examples of accounting standards: Goodwill and intangible assets (FRS 10), Accounting policies (FRS 18), the impact of foreign exchange rates on accounts (FRS 23)

14. Accounting policies
These are the accounting bases that managers of a business have selected to use because
they consider them appropriate to their particular business
they are best suited to present results and financial position fairly
The definition reveals that managers are able, within certain constraints, to select a particular policy
Accounting standards allow some flexibility in treatment of items e.g. depreciation, stock valuations
Accounting policies have to be declared in the annual report
But there is a danger that flexibility opens the door to “windowing dressing” of accounts

15. Accounting conventions and concepts
Boundary rules
Entity
Periodicity
Going concern
Qualitative
Measurement rules
Money measurement
Historical cost
Realization
Matching
Dual aspect
Materiality
Ethical rules
Prudence
Consistency
Objectivity
Relevance

16. Boundary rules (1) Business entity Going concern
as far as accounting is concerned, the business is distinct from all other units, including the owner's)
the firm is a separate entity - separate from owners and managers
Going concern
accounts are prepared on the assumption that the firm will continue into the foreseeable future

17. Boundary rules (2) Periodicity Qualitative
the requirement to produce financial statements at set time intervals
accounts are prepared for a set period of time
this requirement is embodied in Company Law
Qualitative
accountant restrict the data that are collected to those that are easily quantifiable
items that are impossible to put into numbers are not included in a conventional accounting system

18. Measurement rules (1) Monetary measurement
only transactions that can be given a monetary value are recorded in the books of account
money measurement is used for all assets and liabilities
accounting only deals with those items capable of being translated into monetary terms

19. Measurement rules (2) Historic cost
valuations based on original cost rather than current worth
all values are based on historical costs incurred
assets are valued with reference to the cost of acquisition

20. Measurement rules (3) Realisation
a sale is recognised when the product or service has been delivered and the buyer has accepted the invoice
at this point ownership is transferred and the transaction is recognised as sales revenue
in the books of account, goods have been replaced by either cash or by a debtor

21. Measurement rules (4)
Revenues and costs are recorded when they are incurred - not when cash is received or paid
This point needs to be appreciated especially in relation to the profit and loss account:
A sale made in one accounting period is classed as revenue even though the inflow of cash occurs in the next accounting period. A sale is realised when a good is delivered
The costs associated with the sales are matched in the same accounting period whether or not there hade been a cash outflow to settle the payment of the costs

22. Measurement rules (5) Accruals or matching
this is a fundamental principle in accounting - it involves matching of sales and expenses so that all the expenses incurred in making a sale are deducted from it
costs and revenues are matched so that financial records refer to the same goods and services in the same time period
match this revenue against the cost incurred in generating the revenue

23. Measurement rules (6) Dual aspect
all transactions involve two sides and so all transactions are recorded twice
there must always be a debit entry and a credit entry when recording financial transactions which affect the business
the system of accounting works on the principle that whenever value is given, value must also be received

24. Measurement rules (7) Materiality
accountants should not spend time trying to record accurately items that are trivial and immaterial
information is material if its omission or misstatement could influence the economic decisions of users on the basis of the financial statement

25. Ethical rules (1) Prudence
accountants should be conservative when producing accounts
if there is any doubt about the value of any transaction then a conservative approach should be adopted
always consider the worse case scenario and avoid over-optimism
if in doubt underestimate revenue but overestimate costs
the accountant recognises revenue only when it is realised in an acceptable form but provides for all expenses and losses as soon as they are known
provision is made for all known liabilities

26. Ethical rules (2) Consistency
accounts are prepared following the same principles that were used in the previous set of accounts
adopt the same procedure every time for recording and measuring items
use the same accounting policies over time for fair comparison

27. Ethical rules (3) Objectivity Relevance
accounts are based on measurable and verifiable facts
accounts should be prepared with the minimum amount of bias
adopt standard practices
Relevance
include all information that is relevant

28. Financial information should be…
Accurate - free from error of content or principle
Material - useful not trivial
Timely - available in time to support decision making
Relevant - to the issue. Applicable to the purpose required
Reliable - a complete and faithful representation
Comparable - consistent approach to provide meaningful comparisons
Clear and understandable - capable of being understood by those for whom the information has been prepared