Accounting is a process of identifying, measuring and communicating economic information to allow informed decisions by the users of that information. Financial accounting measures an enterprise’s performance over time and its position (status) at a point in time.
The method of making an economically meaningful and comprehensive measurement of performance and position by recognising economic events regardless of when cash transactions happen, as opposed to the simpler cash basis of accounting. (Compared to normal cash accounting accrual accounting provides a more accurate financial statement) – under this method, revenues and expenses are reflected in the accounts in the period to which they relate.
Financial statements are required to provide information such as financial position, financial performance, financing activities and investing activities BALANCE SHEETS: shows the financial position at a point in time INCOME STATEMENT: measures financial performance over a defined period (such as a month/year) STATEMENT OF CASH FLOW: shows the sources and uses of cash during the period
Features of balance sheets include at heading which provides the company name, title of the report and the date at which the financial position is shown. The three elements of a balance sheet are assets, liabilities and shareholder’s equity.
Assets (useful financial resources) are the future economic benefits that are controlled by an entity (organisation) as a result of past transactions or other past events (Measureable in monetary terms). E.g. enterprises cash, accounts receivable inventory.
Assets= Liabilities + Shareholder’s equity
Liabilities (obligations to be paid) are the future sacrifices of economic benefits that an organisation is presently obliged to make to other organisations or individuals as a result of past transactions or events. E.g. loans, mortgages and other long-term borrowings. Shareholder’s equity (owners’ investment) is the excess of assets over liabilities. It is a residual claim of the shareholders on the assets of the organisation. Shareholder’s equity consists of two main elements: share capital, which is the amount that owners have directly invested in the company and the retained profits (cumulative amount of profits).
Income statements (profit and loss statement)
The opening balance+ profit for the year – dividends = closing balance
Statement of cash flows
The statement of cash flows shows the changes during the period in one balance sheet account, namely cash. It shows the receipt of cash and the payment of cash.
Features of a balance sheet:
Title: identifies the enterprise and the point in time at which it is drawn up as well as the currency in which amounts are measured The balance sheet balances
Assets: usually separated into shorter-term ones (current liabilities) and longer-term ones (noncurrent liabilities) Liabilities: similar to assets separated into current liabilities and noncurrent liabilities
An asset is only recognised in the balance sheet when a) it is probable that future economic benefits will eventuate and b) the asset possesses a cost or other value that can be reliably measured. Current assets: are those that are expected to be used, sold or collected within the next year. Noncurrent assets: are expected to have benefits for more than a year into the future
Liabilities are present obligations of the entity arising from past events, the settlements of which are expected to result in an outflow from the entity of resources embodying economic benefits. There are two essential characteristics of liabilities:
1. A present obligation exists and the obligation involves settlement in the future economics benefits - Most...
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