ACCA F3/FFA - Financial Accounting: Chapter: 1 – Introduction to Accounting Topics List
Chapter: 1 – Introduction to Accounting
Topics List
- The
purpose of financial reporting
- Types
of business entity
- Nature,
principles and scope of financial reporting
- Users’
and stakeholders’ needs
- The
main elements of financial reports
1. The Purpose
of Financial Reporting
1.1 What is Financial Reporting?
•
Financial reporting is a way of recording,
analyzing and summarising financial data.
2. Types of
Business Entity
2.1 What is a Business?
•
Businesses of whatever size or nature are
exists to make a profit.
There are a number of ways of looking at a
business. Some are listed below.
v
A business is a commercial or industrial
concern which exists to deal in manufacture, re-sale or supply of goods and
services.
v
A business is an organisation which uses economic resources to create goods
or services which customers will buy.
v
A business invests money in resources in order
to make even more money for its owners.
2.2 Types of Business Entity
There are three main types of business entities.
v
Sole traders
A sole trader-ship is a business owned and run by the one
individual, perhaps employing one or two assistants and controlling their work.
The individual’s business and personal affairs are, for legal and tax purposes,
identical.
v
Partnerships
Arrangements between individuals to carry on
business in common with a view to profit. A partnership, however, involves
obligations to others, and so a partnership is usually governed by a
partnership agreement. Unless it is a Limited Liability Partnership (LLP),
partners will be fully liable for debts and liabilities.
v
Limited Liability Companies
Limited liability status means that the
business’s debts and the personal debts of the business’s owners (shareholders)
are legally separate. The shareholders cannot be sued for the debts of the
business unless they have given some personal guarantee.
3. Nature,
Principles and Scope of Financial Reporting
•
Financial accounting and management accounting
are different. The F3/FFA syllabus focuses on financial accounting.
v
Financial Accounting
Financial accounting is mainly a method of
reporting the financial performance and financial position of a business.
They provide historical information.
4. Users’ and
Stakeholders’ needs
4.1 The Need for Financial Statements
•
There are various groups of people who need
information about the activities of a business.
v
Objective
“The objective of financial statements is to
provide information about the Financial Position, Performances and Changes
in Financial Position of an entity that is useful to a wide range of users
in making economic decisions.” – Framework, IASB
4.2 Users of the financial statements and accounting information
•
Managers of the company
•
Shareholder of the company
•
Trade contacts (Suppliers and Customers)
•
Providers of the finance to the company
•
Taxation authorities
•
Employees of the company
•
Financial analysts and advisors
•
Government and their agencies
•
The public
5.
The Main Elements of
Financial Reports
The principle
financial statements of a business are the statement of financial position and
statement of profit or loss.
v
Statement of Financial
Position
q
Assets
v
A resource controlled by
the entity as a result of past events and from which future economic benefits
are expected to flow to the entity
v
Classify as either a
current or non-current asset to include in the statement of financial position
q
Liabilities
v
A present obligation of the
entity arising from past events, the settlement of which is expected to result
in an outflow from the entity of resources embodying economic benefits
v
Classify as either a
current or non-current liability to include in the statement of financial
position
q
Capital or Equity
v
‘the residual interest in
the assets of the entity after deducting all its liabilities’
v
this is the amount due to
the owners or the proprietor of a business after liabilities have been paid
v
it is included in the
statement of financial position
v
Statement of Profit or Loss
q
Revenues
v
income consists of both
revenue and gains
v
revenue arises from a
business’s ordinary activities such as the sale of goods or provision of
services
v
gains represent increases
in economic benefits such as a gain on disposal of non-current assets
v
revenue and gains are taken
to the statement of profit or loss and other comprehensive income
q
Expenses
v
expenses are losses such as
a those arising on disposal of a non-current asset as well as expenses that
arise in the normal course of business such as cost of sales, wages and
depreciation
v
expenses and losses are
taken to the statement of profit or loss and other comprehensive income
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