Presentation on theme: "ACCG 11900 Introduction to Accounting A Lecturer - Ian Crawford Clinics - Fridays, 12 - 1, 0C2 Notices - See Economics Dept."— Presentation transcript:
ACCG Introduction to Accounting A Lecturer - Ian Crawford Clinics - Fridays, , 0C2 Notices - See Economics Dept.
Financial Accounting External reporting/users Legal requirements Financial information Annual Past events
Fundamental Accounting Concepts Accruals (matching) Consistency Prudence Going concern Substance over Form
Rules Which Affect Accounts Accounting Standards / Accountancy bodies Companies Acts / Company Law Stock Exchange Requirements Audit Reports / Auditing legislation Taxation Requirements
Forms of Businesses Business is always accounted for separately Sole Traders (single owner) Partnerships (multiple owners) Companies (single or multiple owners) LLPs (multiple owners)
Incorporation as a Company Limited liability of owners Taxation differences (corporation tax not personal income tax) Succession and control (company is independent of its owners) Greater financing opportunities (e.g. listed companies sell shares to the public) Costs of compliance and administration
3 Main Financial Statements Balance Sheets: –Show:A snapshot of a business at a point in time. –Show:The net worth of a business. –Net Worth = Owners equity. Profit and Loss Accounts: –Show:The profitability of the business. –Explain changes in Net Worth. Cash Flow Statements: –Show: The liquidity of the business. –Show: Sources and applications of funds. –Explain changes in cash
show them Somerfield accounts explain assets, liabilities point out layout of items
Balance Sheets Show: –snapshot of business at point in time (the balance sheet date) –net worth = net assets = total assets - total liabilities –working capital (= net current assets) –owners equity (= capital + reserves) –sources of finance (= owners equity + long- term liabilities)
The Balance Sheet Equation Net Worth = Owners Equity Horizontal Format: –Total Assets = Total Liabilities + Owners Equity Vertical Formats: #1 Fixed Assets + Working Capital - Long-Term Liabilities = Owners Equity #2 Fixed Assets + Working Capital = Long- Term Liabilities + Owners Equity
Discuss pictorial representation, Bristol Industries and Invented Ltd Point out differences in vertical formats note horizontal format as example 2.2 in textbook Explain briefly what each item is Start talking about differences between company accounts and other business accounts (e.g. proprietors capital) Capital and reserves: –If you dont know how much was invested or brought forward from last year, and how much is this years profit, just use the total figure.
Impact of Different Business Forms The owners equity bit at the bottom of the balance sheet changes depending on the business form Sole trader –no share capital, just capital. No dividends - drawings may be either in P&L or B/S Partnership –like sole trader, but show each partners share separately Company –share capital and reserves, dividends in P&L
Profit and Loss Accounts Show: –history book of transactions over past period –prepared on accruals basis (matching) –explains changes in net worth from one balance sheet to the next –profit = income - expenditure –income = sales revenue (turnover) + other –expenditure = cost of sales + expenses (+ divs) –COS = op. Stock + purchases - cl. stock
Discuss Invented Ltd, esp. with reference to dividends, and net profit/operating profit/PBIT. Note bank interest (on overdraft) is part of operating profit Explain idea of depreciation - non cash item
Cash Flow Statements Show: –history book of cash flows over past period –liquidity (without cash, businesses fail) –sources and applications of funds –explan changes in cash from one balance sheet to the next Remember: –profit is not the same as cash, and cash is not the same as profit
Discuss Invented Ltd note depreciation is added back as it is a non cash item - explain (briefly) what it is (again!)
Balance Sheet Examples (remember the impact of different business forms) A. Dr Seatham Rythe
B. Fast and Furious
C. Cosmetics Ltd
The Ashton Company This is still a simple example, but notice that there are incomplete records This is very common - get used to it now! Here the only missing information is the retained profit reserve for the balance sheet - we can work it out because we know that the balance sheet should balance In future questions could be missing figures for sales, debtors, purchases, creditors, etc. Pay careful attention to the layout
How Transactions Affect the Balance Sheet 1. Joe Smith invests £1,000 cash in his new business.
How Transactions Affect the Balance Sheet 2. The business spends £100 cash on stock.
How Transactions Affect the Balance Sheet 3. The stock is sold for £150 cash. What would have happened if the stock was sold on credit?
How Transactions Affect the Balance Sheet 4. More stock costing £50 is bought on credit.
Profit and Loss Account for this Example
The Ashton Company Again We have the opening balance sheet (p.19) We are told what transactions have occurred over the past period (September) We have to piece together the new (closing) balance sheet, and the profit and loss account Remember to distinguish cash and profit
Cash Flow Statements Remember, these explain changes in cash First, calculate the net cash flow from operating activities, adding back non-cash items to operating profit (=net profit=PBIT) Depreciation is a non-cash item –depreciation is way of spreading the cost of a fixed asset over its useful economic life (application of the accruals concept) –it is deducted from fixed assets in the balance sheet (accumulated amount), and from the P&L account (charge for period only)
Go through first example NOTE ERROR RE OPERATING PROFIT! –see corrected version on additional handout NOTE ERROR RE INTEREST PAID! –see corrected version on additional handout Nicks Newsmart example