CERTIFICATE IN BUSINESS MANAGEMENT Managerial Finance Managerial - - PDF document

CERTIFICATE IN BUSINESS MANAGEMENT Managerial Finance

Lesson 1 Introduction to Financial accounting

Lesson 2 Ratio Analysis Lesson 3 Introduction to Management accounting Lesson 4 Preparation of forecast and Budgets

Managerial Finance – Lesson Synopsis

Lesson 1

Introduction to Financial Accounting

Accounting

Introduction to accounting

The key objective of accounting is to provide financial information for decision makers and other interested parties

Qualitative Characteristic of Accounting Information

• Understandability. The information must be readily

understandable to users of the financial statements. This means that information must be clearly presented, with additional information supplied in the supporting footnotes as needed to assist in clarification.

• Relevance. The information must be relevant to the

needs of the users, which is the case when the information influences the economic decisions of users. This may involve reporting particularly relevant information, or information whose omission

• r

misstatement could influence the economic decisions of users.

Qualitative Characteristic of Accounting Information

• Reliability. The information must be free of material

error and bias, and not misleading. Thus, the information should faithfully represent transactions and other events, reflect the underlying substance

• f events, and prudently represent estimates and

uncertainties through proper disclosure.

• Comparability.

The information must be comparable to the financial information presented for other accounting periods, so that users can identify trends in the performance and financial position of the reporting entity.

Users of Accounting Information

Book-keeping Process

Book-keeping Process

Book-keeping process is the recording

• f

monetary transactions, appropriately classified, in the financial records of an entity, either by manual means or otherwise.

Book-keeping Process

Book-keeping Process

• 1. Transactions

 A transaction is any activity in business that involves

• money. It occurs when something of value is exchanged

with something else of value.

Book-keeping Process

• 2. Source Documents

 Documents generated by the business as an evidence

• r proof of a transaction. Book-keepers extract

information from these documents in posting to journals.

 Invoices  Receipts  Cheque books  Credit notes  Debit notes

– for credit transactions – for cash transactions – for cheque payments – for returned goods from customers – for goods returned to suppliers

Book-keeping Process

• 3. Journals

 Book-keepers maintain set of books in order to reduce

complexities in posting transactions to ledgers.

 Sales journal  Purchases journal  Cash book

– credit sales – credit purchases – payments and receipts of cash

 The journal / General journal – different transactions which do

not fall under above books

Book-keeping Process

• 4. Ledgers

 An account is a record of transactions.

A book of such accounts is known as a ‘ledger’.

 The five main items recorded in ledgers are income,

expenses, assets, liabilities and capital.

Book-keeping Process

• 5. Trial Balance

 A listing of accounts that is prepared to check ‘the

arithmetical accuracy’ of recording of transactions.

Book-keeping Process

• 6. General purpose financial reports

 6.1 – Statement of Financial Position/ Balance sheet

(Assets / Liabilities / Equity)

 6.2 – Statement of Comprehensive income/ Income

Statement/ Profit and loss (Income / Expenses)

 6.3 – Equity Statement  6.4 – Cash Flows Statement

 Also called the final accounts.  These are what is handed out to the users of

accounting information for them to analyse and make decisions.

6.1- Statement of Financial Position

 ASSETS

 Items which the business ‘OWNS’.  Resources that may be used by a business to derive revenue

in the future.

 Exa:

 Land & Buildings  Motor-vehicles  Stocks/Inventories  Trade Debtors / Trade Receivables  Other Receivables  Cash in hand/ Bank balance

 LIABILITIES

 Items which the business ‘OWES’.  an entity’s obligations to transfer economic benefits as a

result of past transactions or events.

 Exa:

 Loans (Long term/ Short term)  Trade Creditors / Trade Payables  Other Payables  Bank Overdraft

6.1- Statement of Financial Position

ASSETS Non-current Assets Assets which are not intended for sale or disposal within one year Current Assets Assets which are intended to be sold

• r used up within one

year Non-current Liabilities Liabilities which would be settled

• ver one year

Current Liabilities LIABILITIES Liabilities which would be settled/due within

• ne year

6.1- Statement of Financial Position

 Equity / Capital / Shareholders’ Fund  The owners’ interest in the business  Includes;

the money which the owners first invested (Share Capital) + Profits/earnings which the business made, but owners did not take back from the business (Retained Earnings)

6.1- Statement of Financial Position

ASSETS

EQUITY / CAPITAL

LIABILITIES

6.1- Statement of Financial Position

6.2- Statement of Comprehensive income

 The Income Statement (Profit & Loss Account/PnL) provides

a picture of the company’s trading performance over the last accounting period (usually a year).

 Prepared on the basis of;

INCOME – EXPENSES = PROFIT

 Rightly so, the last two items, INCOME items and EXPENSE

items are picked from the Trial Balance and are inserted in the income statement.

 INCOME

 Generated through sales (Sales Revenue)  Maybe on credit and/or on cash

 EXPENSES

 Expenses incurred when making sales (Cost of Sales) and

• ther

general expenses (Expenses)

 Maybe on credit and/or on cash

 PROFITS

 Gross Profit = Sales Revenue – Cost of Sales  Net Profit = Gross Profit – Expenses

6.2- Statement of Comprehensive income

COST OF SALES = Opening Stock + Purchases – Closing Stock

6.2- Statement of Comprehensive income

Accounting Concepts

Accounting Concepts

Accounting concepts refer to the basic assumptions, rules and principles which work as the basis of recording of business transactions and preparing accounts.

Accounting Concepts

uniformity and

 The main objective is to maintain

consistency in accounting records.

 These concepts constitute the very basis of accounting.  All the concepts have been developed over the years

from experience and thus they are universally accepted rules.

Accounting Concepts

1.

Business entity concept

2.

Money measurement concept

3.

Going concern concept

4.

Accounting period concept

5.

Dual aspect concept

6.

Accrual concept

Accounting Concepts

• 1. Business entity concept

Definition – This concept assumes that, for accounting purposes, the business entity and its

• wners

are two separate independent parties. Thus, the business and personal transactions of its owner are separate. CAPITAL DRAWINGS

Year end accounts prepared for the business Application -

Accounting Concepts

• 2. Money measurement concept

Definition – This concept assumes that all business transactions must be in terms of money, which means, in the currency of the respective country i.e. Dollars, Pounds. Application –

• All monetary transactions are recorded in

financial statements.

• Items such as loyalty, honesty, skills of employees are

not recorded in the accounts.

Accounting Concepts

• 3. Going concern concept

Definition – This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Application –

• This is an important assumption of accounting, as it

provides a basis for showing the value of assets in the balance sheet.

• Business credit is provided based on this assumption

Accounting Concepts

• 4. Accounting period concept

Definition – All the transactions are recorded in the books of accounts

• n the assumption that profits on these transactions are to

be ascertained for a specified period. Further, this concept assumes that, indefinite life of business is divided into parts. Application – These parts are known as ‘Accounting Periods’ (i.e. Calendar Year / Financial year) and financial statements are prepared for these periods.

Accounting Concepts

• 5. Dual aspect concept

Definition – This concept assumes that every transaction has a dual effect/aspect, i.e. it affects two accounts in their respective opposite sides. It means, both the effects/aspects of the transaction must be recorded in the books of accounts. Application - Dual aspect is the basic principle of accounting.

Accounting Concepts

• 5. Dual aspect concept
• What are these dual effects/aspects...???

‘T’ account

Debit (Dr) Credit (Cr)

Accounting Concepts

• 5. Dual aspect concept

How to determine Debit (Dr) and Credit (Cr)...???

‘T’ account

Debit (Dr)

• Assets Increase
• Expenses Increase
• Capital/Equity Decrease
• Liabilities Decrease
• Income Decrease

Credit (Cr)

• Assets decrease
• Expenses Decrease
• Capital/Equity Increase
• Liabilities Increase
• Income Increase

Accounting Concepts

• 5. Dual aspect concept
• How to determine Debit (Dr) and Credit (Cr)...???

Assets Liabilities Incomes Expenses Capital/Equity

Dr Cr Cr Dr Cr Cr Dr Dr Cr Dr

Accounting Concepts

• 6. Accrual concept

Definition – The meaning of accrual is something (income or expense) becoming due at the end of the accounting period. Application – It means that revenues are recognised when they become receivable irrespective of whether cash is received or not; and the expenses are recognised when they become payable irrespective of whether cash is paid or not.

Accounting Concepts

• 6. Accrual concept

1st Jan 2011 31st Dec 2011 15th Jan 2012 Received cash of $ 1000

2011 2012

25th Dec 2011 Sold goods on credit $1000

In which year’s accounts would this transaction be recorded in...???

• For the year ended 31st December 2011?
• For the year ended 31st December 2012?

Thank You