accounting

accounting basics

  • Accounting is a record keeping system designed to help businesses track various items such as income, expenses, assets, and liabilities.
  • The module will cover 3 important financial statements – being the income statement, balance sheet, and cash flow statement. These documents capture the changes of various items across different time periods.

income statement

  • This statement aims to capture the total business income and expenses, during a particular period, such as one year.
  • The top line typically starts with revenue, with all expenses presented below.
  • Negative numbers are presented in brackets on financial statements.
  • Depreciation is a special type of expense which businesses can claim, which does not represent any cash outflow. The benefit of claiming the expense, is that it reduces reported earnings, which in turn reduces the overall tax liability.

incurred income & expenses

  • For businesses, there can often be a mistiming between when an item is created and when cash is exchanged. For example, a business can provide a customer with a product in one period, but receive cash in the following period.
  • This dilemma means that some analysis of certain situations is required before recording the items.

balance sheet

  • This statement aims to capture the value of assets, liabilities, and equity at a particular point in time.
  • As a way for accountants to validate the accuracy of this statement, they should check that assets – liabilities = equity. If this is not the case, an accounting error exists.
  • Issued capital refers to the amount of money that shareholders have contributed to the business over time.
  • Retained earnings refers to the accumulated net profits which have been reinvested in the business i.e. they have not been released as dividends.

cash flow statement

  • This statement aims to capture the cash inflows and outflows during a particular period.
  • It is split up into 3 parts – being the cash flow from operating activities, investing activities, and financing activities. The sum of the 3 parts results in the net increase / decrease in cash. This change should reflect in the cash balance presented on the balance sheet.
  • The accounting system allows for certain expenses on long-term assets, to be captured on the cash flow statement only (as opposed to the income statement). These are sometimes referred to as capital expenditures.

 

case study

  • This video is a case study of Breville Group and their financial statements.

take accounting quiz

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