ACCG 11900 Introduction to Accounting A

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ACCG 11900 Introduction to Accounting A

• Lecturer - Ian Crawford
• Clinics - Fridays, 12 - 1, 0C2
• Notices - See Economics Dept.

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Financial Accounting

• External reporting/users
• Legal requirements
• Financial information
• Annual
• Past events

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Fundamental Accounting Concepts

• ? Accruals (matching)
• ? Consistency
• ? Prudence
• ? Going concern
• ? Substance over Form

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Rules Which Affect Accounts

• ? Accounting Standards / Accountancy bodies
• ? Companies Acts / Company Law
• ? Stock Exchange Requirements
• ? Audit Reports / Auditing legislation
• ? Taxation Requirements

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Forms of Businesses

• ? Business is always accounted for separately
• ? Sole Traders (single owner)
• ? Partnerships (multiple owners)
• ? Companies (single or multiple owners)
• ? LLPs (multiple owners)

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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

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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

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show them Somerfield accountsexplain assets,
liabilitiespoint out layout of items
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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)

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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

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• 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.

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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 PL or B/S
• Partnership
• like sole trader, but show each partners share
  separately
• Company
• share capital and reserves, dividends in PL

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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

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• 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

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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

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• Discuss Invented Ltd
• note depreciation is added back as it is a non
  cash item - explain (briefly) what it is (again!)

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Balance Sheet Examples (remember the impact of
different business forms)

• A. Dr Seatham Rythe

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• B. Fast and Furious

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• C. Cosmetics Ltd

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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

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How Transactions Affect the Balance Sheet

• 1. Joe Smith invests 1,000 cash in his new
  business.

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How Transactions Affect the Balance Sheet

• 2. The business spends 100 cash on stock.

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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?

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How Transactions Affect the Balance Sheet

• 4. More stock costing 50 is bought on credit.

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Profit and Loss Account for this Example
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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

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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 profitPBIT)
• 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 PL
  account (charge for period only)

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• 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