Accounting for beginners

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Basics of Accounting:
Purpose of the Cash flow statement .
Profit & Loss statement .
Balance sheet statements.
Identify the thirteen accounting principles
and how they each may be breached.

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There are three basic Accountancy reports
that you should be familiar with:
 The cash flow statement - a financial statement that shows how
changes in balance sheet accounts and income affect cash and cash
equivalents, and breaks the analysis down to operating, investing
and financing activities.
 the Profit and Loss statement - a financial statement that summarizes
the revenues, costs and expenses incurred during a specific period of
time
 A balance sheet is a financial statement that summarizes a
company's assets, liabilities and shareholders' equity at a specific
point in time.

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Accounting Principles:
 Matching: Sets out the point of time at which revenue may be recognised.
Breach: A contract is signed for advertising in your magazine. Although you will
not include any advertising in this period's work you still include the revenue paid
in advance.
 Disclosure: The owner is obligated to disclose any transactions of a significant
financial nature in their reports. Breach: The owner determines not to include the
recent sale of property in the financial reports as this may deter potential buyers of
the business.
 Consistency: Accounting reports from one period to the next should be prepared
on the same basis. Breach: The owner uses one method of depreciation for a
particular asset in one period and an alternative method in the second period.

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 Diversity: Allows for the fact that no two firms are the same and
therefore may use different accounting methods.
Breach: The owner decides that because the business down the road
uses the straight line method of depreciation his or her business should
do the same.
 Dependability: Data used in accounting should be subject to stringent
internal control.
Breach: Price calculations are based on outdated information.
 Materiality: Is concerned with which data should be disclosed in
financial reports. All transactions regardless of size should be recorded.
Breach: The owner does not bother to record minor withdrawals of
stock from the business.

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 Accounting Period: The life of the business is broken up into arbitrary
periods for the purpose of measuring profit.
Breach: The owner decides to wait until the project is completed before
preparing the financial reports.
 Monetary: Only events whose impact can be measured in money terms
can be treated as a financial transaction and thus entered in the books of
the business. All transactions should be recorded in money terms.
Breach: Stock is shown in financial reports in quantity amounts.
 Verifiability: All transactions recorded in the books of the business are
supported by documentary evidence.
Breach: Payments are made and recorded without supporting evidence,
such as invoices or cheque butts.

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 Going Concern: Assumes that the life of the business is ongoing, indefinite and
continuous. Also known as the continuity principle.
Breach: The owner does not wish to prepare a balance sheet but rather reports non-current
assets as costs in the period they were acquired.
 Entity: Recognises that the business, from an accounting viewpoint, is separate from the
owner.Breach: The owner includes in the business balance sheet personal assets such as his
or her sports clubs.
 Historical Cost: All items are recorded at the original cost, i.e. the cost at which they were
acquired. Breach: Property owned by the business is shown at the higher market value
rather than for the amount in which it was originally acquired.
 Conservatism: May also be known as prudence. Losses should be recognised as soon as the
business is aware of their likely event, whilst profits should not be recognised until they
actually occur. Breach: The net realisable value of stock has fallen below cost yet the owner
refuses to adjust cost of goods sold calculations

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