accounting concepts and regulations

22/04/2023rules and regulations1


Accounting concepts and an intro to Book Keeping

22/04/2023rules and regulations

Learning outcomes

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To be introduced to the idea of a virtual framework for accounting

To comprehend the rules within which the profession has to work

An introduction to the idea of accounting as a system


Accounting Rules

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Please note that these rules have been established by accountants over a long period of time.

You might find them called other things such as regulations, conventions, concepts, policies, principles.

Whatever they are called they underpin the processes which lead to final financial statements

The adoption of accounting principles and policies is covered by the IAS8.

The main rules under thee headings, boundary rules, measurement rules and ethical rules.


Boundary Rules

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These refer to what should and should not be recorded in the accounts, and they limit what is and is not reported.EntityPeriodicityGoing concernQuantitative

Let’s look at each one in turn


Entity:

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Data collected should be restricted to the entity, this can be difficult for a small entity as it might be hard to distinguish between the affairs of the entity and the owner.

An example might be charging household bills, the accountant will have to distinguish between what has been used for the business and what has been used privately.


Periodicity:

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Most entities have an unlimited life, so the accountant has to decide when reports are drawn up. This will usually be every year.

This can be problematic as the business keeps on going, so this can be quite arbitrary, as things are still going on when the accounts are drawn up.

This leads to a need for what is known as accounting adjustments.


Going Concern:

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This assumes that the business will keep going for the foreseeable future, this has to be right as if the business is about to close down, different valuations might apply


Quantitative;

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Accountants should limit the data collected to matters which are easily quantifiable. For example you cannot measure experience and skills.


Apply the boundary rules to the following examples

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Al Station starts a new business selling timeshares. He wants to charge dog food for his pet Spot, to his sole traders account. Can he? If not why not?

Al wants to charge the entity £10,000 for his extensive experience selling timeshare flats in Majorca. Can he?

A tax bill arrives which Al cannot afford to pay, and his Jeep is repossessed. He tells the tax man that he paid £12,000 for the jeep,, and will knock this off his tax bill.


Al 2

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After bankruptcy, Al starts up a security firm called Al’s Agents.

He buys two trained Dobermans Fido and Spot. They cost £500 each and are £1,000 to train. Can he charge this to the entity?

He buys a year’s worth of dog food from Woofalot. Three months later at the end of April he asks the accountant to close the accounts for the first year and to charge all the food to the one year. Can he do this?


Measurement rules:

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These rules determine what should be kept in the accounting system and how this should be recorded.Money measurementHistoric CostRealisationMatchingDual aspectMateriality


Money measurement: Things are measured in money as it allows us

to fair comparisons between different types of assets

Historic cost: Transactions are recorded at their initial value

or historic cost, however inflation tends to over value profit, especially if it is high.

Attempts have been made to make adjustments for this, but as it varies and goes up and down, none of the methods has stayed in place for too long.


Realisation:

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It is difficult to determine when, for example a sale should be recorded, is it when the sale is made or when the cash received?

Accountants tend to treat these transactions, as when the cash is received, or when they are fairly sure it will be received.

This also needs to be considered for when the entity is making a purchase.


Matching:

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Also known as the accruals principle has a very close link with the realisation rule.

When drawing up final accounts you have consider accrued expenses and prepayments, and the effects they have on the accounts.

An accrual is an amount owing at the end of a financial period for something that has been used such as electricity of wages.

A prepayment is the opposite, something that has been paid for and not yet used. Sometimes, estimations have to be made.


Dual aspect:

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When a transaction takes place, there is a twofold effect. Something is given, and something else received. This has led to a system called double-entry book keeping which has been is use for several centuries. These days most organisations use a computerised system such as Sage or Mind Your Own Books (MYOB).

http://shop.sage.co.uk/instantaccounts.aspx


Examples

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Al asks if he can revalue Spot and Fido to £2,000, as they are such good guard dogs.

Al is due £5,000 for providing security for Big Jay’s leaving party. Jay is currently in Majorca. He asks if he can buy a new Jeep with this.

At the end of the accounting period, he has used 3 months worth of dog food he has paid £12,000 for how will he account for this?

Jay receives £1,500 of the cash that Jay owes, What account(s) will he record this in?


Ethical Rules

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These are things we need to consider when we apply the rules, they are covered by IAS8: Accounting policies, changes in accounting, estimates and errors, which states that accounts must be:Relevant ReliableComparable


Relevance:

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Entities need to provide useful information to users of accounts, however, there is almost a limitless supply which they could provide, what is included in accounts needs to be kept to a reasonable amount.


Reliability:

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For financial information to be reliable it must meet the following five criteria:Sustainability: it must reflect what has taken

placeNeutrality: It must be free from biasError-free: it must be free from errorsComplete: it must include all significant

informationPrudence: it must have been prepared with a

degree of caution


Comparability:

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information contained in financial statements are only useful if they understood by the people who receive them. But they should not be over simplified, so those using the accounts need to have reasonable knowledge of accounting, and have studied it with reasonable diligence.


This is a book/ledger/account

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Blame Pacioli!See HistoryEntities have to keep financial records, as

this is a legal requirement, see http://www.hmrc.gov.uk/factsheet/record-keeping.pdf

http://www.accountant.org/accounting-resources/history-of-accounting-10257/

http://www.hmrc.gov.uk/factsheet/record-keeping.pdf



Entities have to keep financial records, as this is a legal requirement, see http://www.hmrc.gov.uk/factsheet/record-keeping.pdf. The main advantages are:

• keep track of your expenses• ask for a bank loan or credit if you need to• see quickly what you are owed by others and how

much you owe them• save time and accountancy costs• pay the correct amount of tax• receive the correct amount of benefits or credits• avoid paying any extra tax or penalties.




Other issues

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The most important aspect which is often overlooked is an entities need to look after its cash, and inventory, in case of fraud or theft.

Organisations need to be vigilant to avoid this. This link gives one example of the importance accountants give to keeping good bank and cash records.

To be able to do this an entity needs to establish and maintain an accounting system, this will enable it to achieve all the objectives above. Can you think of any other expressions for the accounting system?

http://office.microsoft.com/en-us/accounting-help/reconciling-your-accounts-HA010118191.aspx


The System

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To learn how to learn accounting techniques, it can help to break down the problem into parts, as this makes it less confusing.

Many people perceive accounting to be hard to understand as much new terminology is used, but it is much simpler if you break it down.

One of the first things learnt on most introductory course is what is called “double entry book keeping” which is a way of keeping records.

This is part of a bigger system which starts with a “transaction” and finishes up with the “final accounts”..


Identify Transaction

You need to identify that a transaction has taken place which might affect the organisation or entity (see questions below).

Classify Transaction

Once you have identified that a transaction has occurred in which account should it be recorded?

Record Transaction

Choose the correct accounts and whether it is a debit or a credit – more clues on this are below.

Summarize Transaction

At the end of the accounting period, for example a week, a month or a year the account needs to be added up or summarised.

Trial Balance

This is a summary of all the accounts

Adjustments

Adjustments might need to be made to reflect funds which relate to the relevant accounting period, but have yet to be recorded. (think accruals)

The Final Accounts

When we have made the adjustments the final accounts can be “drawn up”. The same methods are used for simple and very complicated accounts

Interpretation and Analysis

No necessarily part of the system, these methods need to be studied by users to understand what they actually mean!!


Dual Aspect

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Financial accounting systems were started up in Western Europe in the 15th Century, and the invention of double entry is accredited to Luca Pacioli, a Venitian monk, see http://aaahq.org/southwest/pacioli.htm. The reason for this was worldwide trading which was taking place at the time,

Merchants needed to keep a record of what they were owed and who owed them what.

The modern terminology for this is receivables (debtors) and payables (creditors). They also need to know how much inventory (stock) that they had in their warehouses

http://aaahq.org/southwest/pacioli.htm

http://www.investopedia.com/terms/a/accountsreceivable.asp

http://www.investopedia.com/terms/a/accountspayable.asp

http://www.investopedia.com/terms/i/inventory.asp


These days the majority of organisations use a system such as Sage, or if a smaller organisation Excel.

However a more traditional method used in text books is called T-accounts, this will be used in conjunction with other guidance in this session.

But please remember all you are doing are adding and subtracting! The next section will break down the system into its parts, and we will examine in part in turn.


The Equation

A + eX = L + E + R

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Or … simply put

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AssetWhat the entity owns

ExpensesDay to day running costs – be careful the purchase

of non-current assets which last more than a year is not classed an expenses

LiabilityWhat the entity owes

EquityWhat funds the entity

RevenueFunds into the organisation from sales and fees


A simple method

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If the left hand side of the equation increasesAdd it to the

account total

If it decreasesSubtract from the

account total

If the left hand side of the equation increasesSubtract from the

account total

If it decreasesAdd it to the

account total


But before we do this, you need to understand the terms debit and credit, abbreviated to Dr and Cr. This is the core of the double entry system, and if you understand this, everything follows!

So why two entries? Think about the last time you bought a cup of coffee, what

happened? You make a purchase, and for that you gave the person who brewed the coffee some money (even if it was on a card)

There was an exchange, two things happened. Two things happen in every transaction, something is given, and something received.

So both of these happenings have to be recorded in the accounts. Think of some other transaction which might occur in an

organisation.


Identify some transactions

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Setting up the business with a cheque paid into the bank

Making a cash saleBuying ingredients with cashPaying some cash wagesBuying a van for deliveries with cashWhat accounts might you record these in?

don’t forget to keep it simple!


How do we know what to Debit and what to credit?

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An easy rule to remember is:Debit the account that receivesCredit the account that gives

Or just remember that when you put money in the bank you debit the bank

Take money out of the bank you credit the bank

Don’t forget that it is your account of the bank and not the bank’s account of you or your entity


The accounting equation

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Another good way of remembering is by using the accounting equations

Assets = Liabilities +EquityThis is the basis of the Statement of

Financial PositionWe can also consider the extended

accounting Equation


How can I use this for book keeping?

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If an asset or expense increases It’s a debit

If an asset or expenses decreasesIt’s a credit

If a liability, equity or revenue increasesIt’s a credit

If a liability, equity or revenue decreasesIt’s a debit!


Step by Step – don’t rush

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Identify the transaction, and what is happening

Identify the two accounts which it will be recorded in

Decide which one will be debited and which one credited


Which account do I debit and which account to I credit in the following transactions? Why?Making a cash salePaying a parking expense with cashMaking a cash sale of goodsPaying cash into the bankBuying a van for the business

accounting concepts and regulations

Documents

measurement rules

systemaccounting rules

ethical rules

main rules

turn entity

small entity

idea of accounting

al wants