An introduction to financial accounting
What is financial accounting
Financial accounting is the arm of accounting and finance that looks outwards from the organisation towards the business environment, the shareholders, the government and the city. The creation and prentation of the formal annual accounts is a financial accounting activity and it is this area that will be explored in depth in this module.
At the end of every financial accounting period, also called the financial year, every company must prepare and prent to its shareholders an annual report. A t of accounts must also be prented to Companies Hou for record purpos and to the government for taxation purpos. What must be prented is not just a t of carefully organid numbers that reflect the performance of the organisation over the past year. What is also required is a t of additional documents which support the financial reports and place them in context with the business.
The formal accounts rve a number of different purpos, they allow the organisation to meet its statutory reporting requirements to the government and to its shareholders, but also it provides information for potential investors to asss performance against other organisations and against the in
dustry ctor in which the organisation is trading. How the comparisons are made will be addresd later in this cour.
An introduction to formal accounts
The formal accounts of any organisation from the smallest private company to the largest public company listed on the Stock Exchange give basically the same information. The amount of detail will vary depending on such factors as:
•the Companies Act
•the accounting rules and regulations
•whether the company is listed (i.e. are a plc)
•the company's size
高一语文古诗词Companies Act微信卡券
Every registered company has the statutory obligation to prepare accounts on an annual basis. The
accounts must be what is called a 'true and fair' reprentation of the financial state of the organisation and must be, except in the ca of small business, audited by an independent, practising accountant. The t of rules that govern the prentation of accounts is the Companies Act of 1985. This act specifies the minimum information that must be included in the accounts that are filed at Companies Hou.
Accounting rules and regulations
The accounting rules and regulations are called Accounting Standards and are t in the UK by the Accounting Standards Board. The rules are called Financial Reporting
Standards (FRS's), formerly known as Statements of Standard Accounting Practice (SSAP's).
The FRS's define the detailed rules that must be followed in the preparation and prentation of the accounts.
Public Limited Companies (plc's)
Public Limited Companies, that is companies that are listed on the Stock Exchange, must, in addition to the rules that apply to all organisations, disclo additional information covering the comp
any's status, its affairs and activities, its directors, shares and shareholders and loans and interest payments.
Company's size
Company size is now an important factor in the amount of information that needs to be included in the formal accounts and the picture is constantly changing. In 1993 it was decided that companies with a turnover of less than 90,000 need not have their accounts audited by an independent accountant. This and other concessions to small business has greatly ead the statutory obligations and attendant costs of administration for small business. The rules and definitions of levels of requirements are subject to regular change.
Accounting principles
The requirements on financial reporting extend as far as defining principles and concepts governing the way the accounts are prepared. The principles and concepts are called the accounting principles. There are six important principles.
Matching or 'accruals'
The matching or accruals principle aims to ensure the revenues gained as a result of a trade is matched with the costs incurred in the trade in the same time period. For example if a company manufactures computers, the revenues gained through sales and the costs of manufacturing the sold computers appear in the same time period as far as accounting is concerned. In reality parts there will be a time difference between payment of suppliers and cash being received from customers. This time difference is ignored as part of the matching principle.
Prudence
The prudence principle is the most important principle. It means that a company must include all potential loss into the accounts but not potential gains. Debts that are expected not to be paid (hence becoming bad debts) are taken into account but increas such as increas in ast values are not.
Consistency
Consistency requires that the basis of the accounts and the way in which everything is accounted for should be consistent within one accounting period and be consistent from one period to another.
Going concern
Accounts are normally produced on the assumption that the organisation will continue to trade into the foreeable future. This assumption is called the going concern principle. If the organisation is not expected to continue trading special accounts need to be prepared. Substance over form
Substance over form means that the accounts should reflect reality rather than the strict letter of the law. For example, an organisation should include an item in the accounts if it has all the risks and rewards associated with its ownership. This is regardless of the legal position of the item. Long term leas are a good example of this, the organisation has all the benefits of the asts although it does not legally own them. It is required to show them as fixed asts and depreciate them in the normal way. The amount the organisation owes the leasing company is shown in the creditors.
Materiality
It is not necessary to go around the organisation counting pencils and paper-clips at the end of each accounting period. The accounts only need to include everything, only tho amounts that are materially significant to the accounts or are required to be disclod for statutory reasons. For example a £5,000 error in the stock holding where the total stock is in the millions, is not significant. However, a £5,000 error in the salary of a director, which is required to be disclod, would be significant.
Summary
In summary, the six accounting principles ensure that the accounts reflect reality. Judgements are required, especially in determining tho costs which relate to sales. Finally the accounts are not absolutely accurate and do not, necessarily, reflect the legal position of the asts.
The accounts
Large companies and Public Limited Companies (PLC's) follow a prescribed format for the accounts and publish, as a minimum, the following documents at the end of each
financial year. All the documents are usually contained in a single document called the annual report.
•The chairman's statement
•Director's report
•Auditor's report
•Profit and Loss account重阳节是干嘛的
•Balance sheet
•Statement of total recognid gains and loss
•Cash flow statement
•Notes to the accounts
The chairman's statement
不简单
The chairman's statement is principally an up-beat marketing document. The chairman will prent the company in the best possible light. The kind of information that might be contained within the statement includes:
•the organisation's mission and strategy
•general business plans
• a summary of the overall trading performance compared to the economy and the business ctor
•what the future holds
•any special interest items or events that occurred during the year such as mergers and acquisitions
Director's report
白血球低The director's report is required by statute from every listed company, limited companies and PLC's. Information that will commonly be found in the director's report includes:•principal activities of the organisation
•propod disposition of the profit showing how much will be paid in dividends and how much transferred to rerves
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•major changes in the fixed asts or their value
•directors, directors' interests and shareholdings
•any changes in the directors
•equal opportunity and minority group employment policies
•any donations to political parties or charities if over £200
•personal liability insurance taken out for directors or auditors
跟冬天有关的词语•the status of the company
•the appointment of the auditors
Auditor's report
All Limited and public limited companies, except small business, are required to have their accounts audited by a certified accountant. The accountant is required to review the accounts to verify that they are a true and fair view of the company's financial position in
terms of the balance sheet and profit and loss, and make a written statement to that effect. If the accountant does not consider the accounts to be a true and fair view they are required to make a statement to that effect in their auditor's report.
It would be normal for the accounts to be produced such that no qualification is required by the auditors so the auditor's report is really an 'exception' report. It contains no uful information except when there is a potential problem of cau for concern.
Profit and Loss account
The profit and loss account shows the income gained from sales of the product or provision of the rvice and the costs the company has incurred in achieving this level of sales income. The sales income will be the value of everything sold during the period to which the account refers, usually one accounting period (one financial year), and all the costs during the same period.文具盒图片
The profit and loss account is concerned with income and costs not cash flow. There is an important distinction here. When a product is sold and an invoice is issued the sale has been made and the value of the sale goes into the sales income box, even though no cash may have been received for it. Similarly when raw materials are purchad and an invoice is received for payment for them, the cost has been incurred even though cash may not have been paid for them.
the account has been constructed, for example, 1st April 1995 to 31st March 1996.
