Introduction to accounting (Financial statements (FRS 102 allows companies…
Introduction to accounting
FRS 102 allows companies to retain the traditional terms
The traditional terms that are used in the UK are derived form regulations, namely the Companies Act 2006, and therefore the financial statements prepared under FRS 102 are more than likely to maintain reference to a balance sheet and a profit and loss account
The balance sheet will be renamed as the statement of financial position
The profit and loss account will be named as the income statement
From 1 January 2015 it will be mandatory for UK companies (except those reporting under the Financial Reporting Standard For Smaller Entities) with accounting periods beginning on or after this date to adopt Financial Reporting Standard (FRS) 102
UK private limited companies are moving towards the adoption of International Financial Reporting Standards (IFRS)
The financial statements that are often regarded as the annual accounts are the profit and loss account and the balance sheet
There are three principal business structures
Limited liability company
In the UK, all types of business have to maintain records for taxation purposes which can be inspected by HMRC
Each type of business is subject to different levels of regulation and legislation
If a limited company loses all its assets, the maximum liability of a shareholder is the value of their shares
Once a shareholder has paid for their shares, their liability for the company's debts is limited to those shares
To become a member or shareholder of a limited company, an individual must buy one or more shares
The capital of the company is divided into shares which have a fixed value per share.
A separate legal entity owned by shareholders and managed by directors
A business owned by shareholders with their liability limited to their share capital
In the absence of a partnership agreement, profits and/or losses will be equally shared in accordance with the provisions of the Partnership Act 1890
Each partner will also receive a share of the profits as per the partnership agreement
Each partner will own a share of the business and a share of any liability for any debts that the business may incur
A business where ownership is shared among two or more people
The individual benefits from owning all of any annual profit generated by the business
Has sole responsibility for all the affairs of the business and has unlimited liability for all the debts of the business
A person carrying on business with sole legal responsibility for the business, not in partnership or as a company
The need for accounts
Provides the business with an opportunity to select on its annual performance and communicated this to the wider community. As such, this has now become integrated as part of corporate governance best practice
Producing annual account is part of best practice for any business. The annual accounts provide a report on the performance of the business for an accounting period
Annual accounts, especially in the case of limited companies, help governments identify their corporation tax revenue. They also promote standardisation of reporting behaviour for businesses.
The production of annual accounts for all or most business types is a mandatory requirement across the globe.
A business should produce annual accounts because there will be parties with an interest in the business who will be making judgements and decisions about the business
For example an investor may want to decide whether the business will be a good investment
For example a prospect employee may be undecided whether the business is one for whom they wish to work
Accounting involves the processing of transactions and it converts them into useful and usable information for both the users of accounting information and the stakeholders of the entity
What is accounting?
Accounting is not only a process but also an information system
The communication of information arises from the internally generated financial reports and externally reported financial statements
Focus on the identification of a transaction and a measure of its amount in monetary terms
A process or set of interrelated procedures. These procedures span from recording the individual transactions to the preparation of the periodic financial statements
An operational definition of the term has been obtained from the American Accounting Association, which defines accounting as 'The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information'