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Framework of Accounting
Aims of the Session
• Users of financial statements.
• Framework of accounting –
▫ Comprises accounting principles
▫ Accounting policies
▫ Ethical principles
• Application of ethical principles when preparing
financial statements.
Users of Financial Statements
• Owners or potential owners.
• Potential investors.
• Suppliers.
• Employees.
• Customers.
• Government agencies.
• The public.
Why Would the Users Use Them?
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Profitability.
How much money can be taken out or paid out.
Value of the business.
Can finance charges be covered.
Asses how much of the business is funded by debt.
Should the supplier supply?
Is the business realistically a going concern?
Can we be paid more?
Will the business continue to supply goods/services.
Tax calculations.
Is the charity being run correctly?
Contribution to the economy as a whole.
Framework of Accounting
Consists of 3 main areas:
• Accounting Principles
• Accounting Policies and Characteristics
• Ethical Principles
Underlying Assumptions of Accounting
Principles
Accounting principles ensure that records and statements
that are prepared are relevant and reliable, are
comparable and understandable.
Financial statements and records can be used for:
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Internal control.
Measuring business performance (comparability).
Obtaining credit and financing.
Statutory requirements.
Accounting Principles – Business Entity
What does this mean?
• Only report on the activities of one particular
organisation.
• Personal assets/liabilities of the owners are kept
separate.
• Main links are drawings and capital.
Accounting Principles – Materiality
• Does the amount make a difference to the decision
making?
• Will a £1000 error make a difference to a company with
a turnover of £1 million?
• But if the turnover was £50,000 then it may.
• Materiality needs to be relevant to the business.
• Material misstatement the consequences:
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Profit is overstated
Assets are overvalued
Profit is understated
Sales turnover is overstated
Accounting Principles – Going Concern
• Is the business viable for the next 12 months?
• Assets will be valued differently if not.
Accounting Principles – Accrual Accounting
• Income and expenditure relate to the correct accounting
period.
• Accruals and prepayments from accounts prep.
• Examples are:
▫ Accruals
▫ Prepayments
▫ Provisions for doubtful debts
▫ Cost of inventory
Accounting Policies & Characteristics
• These are the policies that a business uses to show the
effect of financial transactions:
▫ Depreciation
• They need to be relevant and need to aid the faithful
representation.
• Supporting qualitative accounting characteristics:
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Comparability
Verifiability
Timeliness
Understandability
Ethical Principles in Preparing Financial
Statements
• Integrity
• Confidentiality
• Professional behaviour
• Objectivity
• Professional competence and due care
Lesson Recap
• Users of financial statements are: owners, lenders,
employees.
• Accounting principles: business entity, going concern,
accruals and materiality.
• Policies and characteristics: verifiable, comparable, timely
and understandable
• Ethical principles: integrity, confidentiality, professional
competence & due care, objectivity, professional behaviour.
Exercises