1. Introduction to Accounting

Report
Introduction
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The hows and whys?
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Learning Outcomes
An introduction to some of the concepts of
financial accounting
To familiarise you with some of the concepts
and conventions which accountants work
within
To help you to understand that accounting is
not just about numbers! There is more to it
than that
To explain who uses accounts and why
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Workplace skills
◦ The nature of jobs will continue to change and its
not just technical skills which are , needed
◦ You also need to develop meta-cognitive skills such
as communication, critical thinking, logical
argument, presentation and
◦ Professionalism
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To learn some technical detail
To understand the terminology
Because you will come across terminology on
a daily basis in a working environment
It’s a good way of learning how to learn
It’s a core subject for accountants,
economists, analysts, bankers, and all
financially based professions
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In groups of two
Give me some words to describe what you
think accounting is.
What frightens you about accounting?
Stop at the Pinger
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Give me some words to describe accountants
and what they do
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Read and practice, copy the answer if you must
Try to understand why you are doing something
For example when we start to do book keeping
not
“I’ll debit the bank because that’s what teach did”
but “I’ll debit the bank because its an asset
account and it is increasing” followed by “and I’ll
credit Sales as the revenue increases
This is called deep learning
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Surface is what you can see
◦ Just to pass the exam
◦ Forget it afterwards
◦ Not knowledge
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Deep
◦ You want to know why, you have an enquiring mind
◦ You understand what you are doing and why you
are doing it
◦ Professional!
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Summary
Intended learning outcomes
By why are we learning this?
Questions
Technical stuff
Short break
A work through
Plenary – what have we learnt
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Accounts are used by all sorts of stakeholder
groups for all sorts of reasons. Examples include
banks,
financial institutions,
customers,
debtors and creditors,
members of the public,
private investors,
the tax authorities,
analysts.
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Accounts tell us the financial position of an
entity.
The basic accounting question tells us that all
the assets equal the equity invested in the
company and the liabilities.
We are able to see this from the statement of
financial position. They give us the numbers.
The limited accounts of limited companies
can be downloaded from several websites,
including their own. A good source is the
Financial Times website at FT.com.
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Financial accounts are snapshot of what has happened in
the period they refer to,
they do not tell us everything, a little like looking at a
picture and wondering who is on the left or the right or
what was happening the night before!
Other issues need to be considered such as
◦ what has happened in previous years or
◦ how competitors are doing.
There are techniques for doing this such as ratio analysis,
which is considered in week 9.
More and more we also need to considered issues
concerning the environment such as climate change and
ethical waste disposal which is considered in week 10
about qualitative issues.
Plastic Bags
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Financial accounting
Management accounting
Auditing
Taxation
Financial Management
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Financial accounting is a way of reporting
what has happened in a given financial
period, which could be a day, a week, a
month, but is usually a year. Accounts are
summarised on financial reports, called
the income statement (used to be called the
profit and loss account);
the Statement of Financial Affairs, (used to be
called the Balance sheets; and
the Statement of Cash flows (used to be
called the Cash Flow Statement)
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Financial accounting involves:
 Recording transactions
 Preparing financial statements
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Books of account
Bookkeeping
◦ Manually in books
◦ Computer accounting package
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Summarising
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Prevent theft
Pay your way
Check if worthwhile working
Keep tax inspector happy
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Those who supplied the business with
goods or services
Those who provided cash such as the bank
Employees
The government
The public
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What information would you expect to be
100% accurate?
How accurate would you want the stock of a
chain of confectioners shops to be?
What would you need to consider when
deciding on the level of accuracy that you
require?
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Transaction – a business activity involving
money
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Assets – resources available to a business
Liabilities – amounts owed by a business
Capital – amount invested in a business by its
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Statement of financial position – a list of
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owner
◦ resources (assets) and
◦ sources of these assets (Capital and liabilities)
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Inventory – goods available for sale
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Statement of income – report of income and
expenses
Income or revenue – what the business earns
from the sale of goods or provision of
services
Expenses – what it cost the business to earn
the income
Gross profit – the difference between sales
revenue and cost of what was sold
Net profit – gross profit less all expenses
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Management accounting stated at the time of
the industrial revolution, as people moved
from rural communities into towns and cities,
and businesses and their owners wanted to
predict what might happen if they costed
ahead, or budgeted for cash flow.
Examples include, break even analysis,
costing, pricing, variance analysis, costvolume profit analysis, activity based costing,
budgeting.
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Management accounting is an essential part of
day to day business management, and best
explained using spreadsheets, knowledge of
which is also essential for business management.
CIMA define management accounting as “the
application of the principles of accounting and
financial accounting to create, protect , preserve
and increase value for the stakeholders of profit
and not-for profit enterprises in the public and
private sectors.” (CIMA, 2005)
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This is checking that the account present a
true and fair view of the financial position of
a limited company. It is defined by CIMA
(2005) as “Systematic examination of the
activities and status of an entity based
primarily upon investigations of its systems
controls and records.”
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External auditing: external auditors are appointed by
the owners of an entity, who are independent and not
part of it. They report to the owners and not the
management. They may do detailed checking of the
records (or books). They might also ensure that there
is what is known as an “audit trail” so that
transactions can be traced through the books.
Internal auditing: They can work closely with the
external auditors, but have a different role. They are
employed by the company so are influenced by this,
they are not independent, they may have a
consultancy role, and perform, for example value-for
money audits, and possible fraud investigations.
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This is a highly complex branch of accounting,
and specialists help individuals and limited
companies to work out their tax affairs. They
often advise entities how to pay less tax this is
known as tax avoidance, which is perfectly legal.
However tax evasion, or the non-payment of tax
is a serious offence which can lead to
imprisonment. More details about the UK tax
system can be found at the tax Office or Her
Majesty’s Revenue and Customs website at:
http://www.hmrc.gov.uk/
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This is a relatively new form of accounting,
and financial managers are responsible for
setting objectives and planning ahead. They
will be involved in the management of the
organisation and gaining their knowledge
from more than just accounting rules and
regulations, using disciplines such as
economics maths and management too.
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Learn how to learn
Engaging in learning is more fun that not
engaging
Accounting is not just about numbers
There are several types of accounting
Accounting is a profession
There are several professional bodies
Look at the web sites and find out what the
objectives of the accounting bodies
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