ABDA Lecture 1 PDF

Preview

Summary

Lecture 01 - ABDA...

Description

01: Financial Ac Accounting counting Beginning Assumptions Accounting Period Assumption: - the assumption that the accounting period can be equally divided for accuracy in recording economic information Monetary Unit Assumption: - assumption that business transactions can be measured in terms of monetary units since it is more stable and dependable - If an economic activity cannot be expressed in dollars, then it is not recorded in the accounting system -It assumes further that the dollar is a reasonably stable measure (the effect of inflation and deflation can be ignored) Economic Entity Assumption: - Assumption made by accountants that the personal financial activities of the business owners are/can be separated from the activities of the business itself Going Concern Assumption: - Assumption that the business will continue to operate unless there is evidence to contrary

Accounting Principles Revenue Recognition Principle: - Revenue should be recorded when a resource has been earned regardless of when the cash is received. - Revenue is recognised/recorded only once the service/good is already given. Matching Principle: - Expenses should be recorded in the period resources are used to generate revenues - Expenses should only be recognised/recorded once the resource is used to generate revenue Cost Principle (Assets):

- States that assets should be recorded and reported at the cost paid to acquire them. - The asset should be recorded according to its original price (the original value at the time it was acquired/purchased)

Reporting Profitability: The Income Statement Income Statement: - A financial statement used to report the company’s revenues and expenses (profits and loss) over a specific period of time. - This can reflect the company’s financial health and thus, can help in making decisive decisions regarding the company’s present and future activities. - Demonstrates the success or failure of the business over that specific period - Also called Profit and Loss Statement or Statement of Comprehensive Income Revenue: - Increase in resources resulting from the sale of goods (sales revenue) or the provision of services (service revenue). - The income gathered for the services/goods that the business provides Revenue Recognition Principle: - Revenue should be recorded when a resource has been earned regardless of when the cash is received. - Revenue is recognised/recorded only once the service/good is already given. Expense: - Decrease in resources resulting from the operation of a business. - Costs incurred due to business operations Matching Principle: - Expenses should be recorded in the period resources are used to generate revenues - Expenses should only be recognised/recorded once the resource is used to generate revenue

Reporting Financial Position: The Balance Sheet Balance Sheet: - the financial statement that shows a business' assets, liabilities and equity at a specific point in time - With the purpose to show the business’ resources and the claims against those resources Assets: - Economic resource that is objectively measurable that results from a prior transaction, and that will provide future economic benefit. - A resource of the business with an economic value that is bought to either increase the firm’s value or to provide future benefit (generating sales/cash/income). - Tangible (cash, property, inventories, receivables, equipments)/ or Intangible (trademarks, goodwill, intellectual property, copyrights) Cost Principle (Assets): - States that assets should be recorded and reported at the cost paid to acquire them. - The asset should be recorded according to its original price (the original value at the time it was acquired/purchased) Liability: - A present obligation of a business that results from a past transaction and will require the sacrifice of economic resources at a future date. - A legal financial debt/obligation of the business that comes from the business operations. In order to settle liabilities, assets must be used. - Includes accounts payable to suppliers, salaries payable to employees, and taxes payable to governments. Equity: - The difference between a business' assets and liabilities and represents the share of assets that are claimed by the business' owner(s). - The assets claimed by the shareholders/the money returned to the shareholders once all the liabilities are paid off. - Ways business acquire equity: 1. Contributed Capital - Resources that investors put into a business in exchange

for an ownership interest. 2. Profitable Operations: - Dividends: Profits distributed to the company’s owners/ shareholders - Retained Earnings: Earnings kept by the business from its operations

Reporting Equity: The Statement Of Changes In Equity Statement of Changes in Equity: - financial statement that reports the change in a business' equity (contributed equity, reserves and retained earnings) over a specific period of time. Linking the Income Statement and the Balance Sheet: - The Income Statement provides the profit earned during the period which the Statement of Changes in Equity uses to solve for the retained earnings. The retained earnings is then included in the Balance Sheet.

Reporting Cash Flows: The Cash Flow Statement Cash Flow Statements: - A financial statement that reports a business’ sources and uses of cash over a specific period in time. - Deals with cash inflows and outflows Financing Activities: - Raising money for the business - Borrowing money from creditors and receiving contributions from investors are both ways to finance a business' operations. - Debt, Equity, Dividend Investing Activities: - Once sufficient capital is raised, businesses usually acquires the revenue generating assets that it needs for operations. - Eg. Buying supplies needed for business operations

Operating Activities: - Operating a business may include the purchase of supplies, the payment of employees and the sale of products.

The Objectives Of Financial Reporting Financial Reporting/Reports: - Must provide financial information that creditors, stakeholders, administration and other entities may use in making decisions such as providing resources, settling loans, etc. Relevance - Capacity of accounting information to make a difference in decisions - Has predictive value (allows the user to better determine what the future may be), confirmatory value (provides feedback on past predictions) or both. Materiality: - Threshold at which a financial item behinds to affect decisionmaking - has the capacity to affect decisions when omitted or misstated. Faithful Representation: - Presented in a way that is complete, neutral and free from error. - Does not mean accurate (estimates and judgements are made). Prudence: - Caution when making judgements under conditions of uncertainty. Comparability: - Ability to use accounting information to be weighed against or contrasted to the financial activities of different business. - Comparing allows an entity to assess its market positions, gauge its success and set future goals based on industry standards Verifiability: - Information allows different independent observers to arrive at the same or similar outcomes. - Allows users to accept that financial statements faithfully

represent the business activity they claim to represent Timeliness: - Information is provided quickly enough that the user can take action. Understandability: - Ability of accounting information to be comprehensible to those who have a ‘reasonable understanding of business and economic activities and accounting and a willingness to study the information with reasonable diligence. - Ability of the information to be understood by a general person...