Financial Accounting / Statements
Financial accounting can be defined as the process of recording, summarising and reporting financial transactions of a business. Using guidelines, such transactions are recorded, summarised and presented in financial statements such as the balance sheet or an income statement. In particular, the double entry booking keeping system lies at the heart of the financial accounting. Double entry involved the classification of items into one of the five categories: assets, liabilities, equity, income or expense.
An asset is an item owned by a company which is expected to provide future benefits. There are two types of assets listed in the balance sheet: Fixed assets (e.g. building) and Current assets (e.g. cash). A liability is a company’s debt obligations. A company can have long term liabilities (e.g. loans) and current liabilities (e.g. payables). Equity refers to the ownership interest in a business. Income is the money earned from business operations (e.g. sales revenue). Expenses are the costs associated with operating a business (e.g. wages).
The objective of this module is to understand the double entry accounting techniques to a range of simple transactions. You will also learn about concepts such as accruals and prepayments. By the end of this module, you will be able to prepare ledger accounts as well as a trial balance. Ledger accounts are a systematic refection of all transactions in a particular account.
The module also covers the main financial statements that appear on a company’s annual report including: the income statement, the balance sheet and the cashflow statement. You will understand how to structure and read an Income Statement, which essentially represents the financial performance of a business over a period of time. It provides a summary of a company’s revenue and expenses from operating and non-operating activities.
You will understand what a balance sheet is and how to compete one. In short, a balance sheet reflects the position of a company’s assets and liabilities at a particular point of time.
The last financial statement examined is the cash flow statement. This is a financial statement that illustrates how changes in the balance sheet and income affect a company’s cash flows. Specifically, the cash flow statement breaks the analysis down to three areas: operating, investing and financing activities.
Lastly, you will gain an understanding of the use and the limitations of ratio Analysis. Ratios are an expression of one number in terms of another. This form of analysis facilitates comparison between the financial performances of different businesses or industries. Ratios, vertical and horizontal analysis are commonly used by financial analysts because they are useful tools for planning, controlling and monitoring an organisation’s performance. A range of financial ratios are explored including: liquidity, solvency, profitability, efficiency and investor ratios.
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