Chapter 01 - Introduction To Accounting
Chapter 01 - Introduction To Accounting
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Accounting – CFAB ICAEW
Exam
Duration: 90 mins
Pass rate: 55 marks
CBE
Specification grid:
Contents Weighting
Maintaining financial records 30%
Adjustments to accounting records and financial statements 35%
Preparing financial statements 35%
100%
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Chapter 1:
Introduction to Accounting
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Introduction to accounting
Qualitative
The regulation
The purpose of The main characteristics Accounting
of accounting Capital and
accounting financial of useful concepts and
and ethical revenue items
information statements accounting conventions
considerations
information
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The
Accounting
Process
Accounting links
decision makers with
economic activities Accounting
Economic and with the Information
Activities
results of their
decisions.
Reported
Decision Results of
Actions Makers Actions
1-5 (decisions) (decisions)
What is Accounting?
identifies,
records, and
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What is Accounting?
Illustration 1-1
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Types of business entity
Advantages
Limited paperwork- Additional capital can Raising finance
save cost be raised easier
Owner complete Division of roles and Investment less risky
control business responsibilities, Separate legal
Owner is entitled to increased skill set identity from
profit and ownership Sharing of risk and shareholders
of assets losses between more Easy to transfer
No law requirement people shares from one
to financial account No law requirement to owner to another
Highly flexible financial account unless Tax advantages
Limited liability
partnership
No company tax
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Advantages & Disadvantages
Sole traders Partnerships Limited liability companies
Disadvantages
Owner is personally Partners are liable for Have to publish
liable for all debts all debts unless LLP annual financial
(unlimited liability) Costly when setting statements
Personal property up partnership FSs have to comply
may be vulnerable agreement with legal and
Large capital are Slower decision accounting
less available making requirements
May lead less When one partner F/S have to be
benefit for leaves, the audited
employees partnership is Share issues are
Continuity of automatically regulated by law
business in the dissolved and another
event of death or agreement is required
illness of the owner Continuity of business
in the event of death
or illness of the owner
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Who Uses Accounting Data?
HM Revenue &
Management Customs
(HMRC)
Trade Owners
contacts
Bodies
Finance
provider Common Questions
Financial
analysts &
Employees advisers
Government
The public agencies
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Who Uses Accounting Data
Internal
Users
Illustration 1-2
Questions that internal
users ask
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Who Uses Accounting Data
External
Users
Illustration 1-3
Questions that external
users ask
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Purpose of financial statements
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Objectives of External Financial
Reporting
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Objectives of Financial Reporting
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The main financial statements
Statement of Statement of
financial positition Profit or Loss
Definition: A list of all the assets Definition: A statement
controlled and all the liabilities displaying items of income and
owed by a business as at a expense in a reporting period
particular date: it is snapshot of the
as components of profit or loss
financial position of the business at
for the period. The statement
a particular moment. Monetary
amounts are attributed to assets shows whether the business
and liabilities. It also quantifies the has had more income than
amount of the owners’ interest in expense (a profit for the period)
the company: equity. or vice versa (a loss for the
Equity: the amount invested in a period)
buisness by the owners.
legislation
Accounting
Accounting concepts &
standards individual
Code judgement
of
ethics
True & fair Generally
accepted
View/fair accounting
presentation practice
(GAAP)
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The regulation of Ethical considerations
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Code of ethics
Integrity
Professional
behaviour Objectivity
Professional
Confidentiality competence
and due care
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Generally Accepted Accounting Practice (GAAP)
Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Stockholders’ Equity
information Statement of Cash Flows
Note Disclosure
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GAAP
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Qualitative Characteristics of financial
information
Qualitative characteristics are the attributes that make the
information provided in financial statements useful to users.
Relevance Comparability
Faithful
representation Verifiability
Timeliness
Understandability
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Qualitative Characteristics
of financial information
Only relevant information can be useful to
Relevance the decision making needs of users
(making a difference in decisions if
information has predictive value,
confirmation value or both)
ENHANCING
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Fair presentation
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Fair presentation
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Accounting concepts & conventions
Accounting Principles
Accounting Concepts Accounting Conventions
• Accounting entity assumption • Convention of Disclosure
• Going concern assumption • Convention of Materiality
• Accounting period assumption • Convention of Consistency
• Money measurement • Convention of Conservatism
• Accrual basis
• Dual aspect or Double entry
• Matching concept
• Cost concept (historical cost)
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ASSUMPTIONS FOR FS
is the underlying
assumption for financial
framework
GOING
CONCERN
BASIS FOR
PREPARING
FS
ACCRUAL
BASIS
is not an underlying
assumption, but FS should be
prepared on an accrual
basis.
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GOING CONCERN ASSUMPTION
Unless:
GOING-
BREAK-UP
CONCERN
BASIS
ASSUMPTION
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Going concern assumption
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ACCRUALS BASIS
The effects of transactions and other events are recognized when they occur
(and not as cash or its equivalent is received or paid) and they are recorded in
the accounting records and reported in the FSs of the periods to which they
relate.
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The Accrual Basis of Accounting
Current Future
Accounting Accounting
Period Period
Jan. 1, 2015 Dec. 1, 2015 Jan. 1, 2016 Dec. 1, 2016
OR
ACCRUAL CASH
BASIS BASIS
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Cash basis
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The Matching Principle: When To Record Revenue
Matching Principle
Revenue should be
recognized at the time
goods are sold and
services are rendered.
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The Matching Principle: When To Record Expenses
Matching Principle
Expenses should be
recorded in the period
in which they are used
up.
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ACCRUALS BASIS
Example:
Tom prints 20 T-shirts in his first month of trading (May) at a cost of $5 each. He
then sells all of them for $10 each.
Tom has therefore made a profit of $100, by matching the revenue ($200) earned
against the cost ($100) of acquiring them.
If Tom only sells 18 T-shirts incorrect to charge her income statement with the
cost of 20 T-shirts, as she still has two T-shirts in inventory.
If he sells them in June, he is likely to make a profit on the sale. Therefore, only
the purchase cost of 18 T-shirts ($90) should be matched with her sales revenue
($180), leaving her with a profit of $90.
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Accounting concepts
Assumptions
Monetary Unit Assumption requires that companies
include in the accounting records only transaction data that can be
expressed in terms of money.
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Historical cost
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Materiality and aggregation (IAS 1)
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Practices
Question Banks
Self-test
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