Financial Accounting Revision Notes

Financial Accounting Revision Notes

Financial Accountants- tend to collect and record financial information

Management Accountants- tend to budget and compare to actual results, then rethink budgets

Different types of Businesses:

• Sole traders
• The individual
• Little legislation
• Unlimited liability
• Prepare accounts for tax purposes

Partnerships

• Two or more people trading together
• Different skills
• Financial support

Limited Companies

• Separate legal entity
• Companies Act 2006
• Ownership is by the purchase of shares
• Limited Liability

The Duality Convention

• Every transaction has two aspects
• Every transaction is entered twice into the accounting records

Different Types of Accounts:

The Trading Account:

Sales (minus) Cost of Sales = Gross Profit

The Profit and Loss Account:

Gross Profit (minus) Expenses = Net Profit

The Balance Sheet:

A summary of Assets and Liabilities, this shows what the business has and what it owes.

Cash Flow Statements

Shows where the money came from and where the money has gone.

Details of the Balance Sheet:

• Fixed or Non-Current Assets are assets which are held for more than a year to produce wealth e.g. Vehicles, Equipment and Buildings
• Current or Quick Assets- Items that change their form regularly regularly e.g. Stock, Money, Debtors, Bank and Cash
• Current (Quick) Liabilities- Items to be paid within twelve months e.g. Creditors
• Long term Liabilities or Non-Current liabilities- loans repayable in excess of one year e.g. Mortgages
• Third Liability-

Accounting Conventions- assumptions to follow when preparing accounts

Balance Sheet Equation: Capital = assets (minus) liabilities

The Vertical Balance Sheet example

It is essential that the working capital or net current assets is a positive number as this represents the liquidity and viability of the company.

Trading account example

• The gross profit is transferred to the P&L account which is effectively a continuation of the Trading Account

The Profit and Loss Account example

• Gross Profit must be great enough to cover consumable expenditure
• Net Profit must be great enough to cover investments in assets and drawings
• Net Profit represents an increase in the wealth of the business
• Net Profit is transferred to the BS and increases the capital value of the business
• The P&L A/C shows the Net Profit for a period of time, usually one year
• The BS shows the state of affairs of a business at a point in time,  usually at the year end
• The BS values are used to open the ledger accounts for the following trading period

The capital account of a sole trader: this account shows only features that can appear in the capital account of a sole trader

Capital Account example

Balancing Accounts: