RN Week 1 Introduction Slides Students

Introduction to
Accounting & Finance

Introduction to the module
• The importance of the management of finance, the
keeping of accounts and the analysis of them, and the
assessment of business financial performance.
• The key issues of financial management, the value of
financial statements and the measurement of financial
performance are all explained and developed.
• Central to the role of finance and accounting is an
understanding of how information produced, analysed and
applied can be used by businesses to create value and
measure whether financial objectives have been met.
Module Content
• Introduction to the module
• Costs
• Cashflow forecasting
• Accounting fundamentals
• Analysis & Interpretation
Introduction
Introduction
• Business activity cannot take place without finance
• Finance decisions are some of the most important that
managers have to take.
• Inadequate or inappropriate finance can lead to business
failure
Why business activity requires finance
• Finance is required for many business activities.
• Here is a list of just some of the main situations in which
businesses will require finance:
−Setting up a business will require cash injections from
the owner(s) to purchase essential capital equipment
and, possibly, premises. This is called start-up capital.
−All businesses need to finance their working capital –
the day-to-day finance needed to pay bills and expenses
and to build up stocks.
Simple cash cycle
Cash
Materials
Sell
& Stock
Production
Types of Business Entities
• Sole trader, also known as a sole proprietorship
• Partnership
• Limited company, also known as a corporation
Sources of Finance
• Internal
− Profits retained in the business
− Sale of assets
− Reductions in working capital
• External
− Short-term sources (There are three main sources of short-
term external finance)
• bank overdrafts
• trade credit
• Short term loans
− Long-term sources
• Hire purchase and leasing
• Long-term loans from banks
The decision making process
Set
Objectives
Gather
Review
Information
Analyse
Implement
Information
Select
Course of
Action
Accounting
• Accounting is about the information needed to run a
business or organization.
• Accountants consider what information is required and
then communicate it in a meaningful way.
• Accounting standards dictates how transactions are
recorded
Accounting & Finance
• Accounting & Finance are both essential to any
business……large or small
• Accounting is a form of record keeping that focuses on the

day-to-day flow of money in and out of a company or
institution
• Finance is a broader term for the management of large
amounts of money and the planning of future growth
Activity
• Salary or Allowance
• How do you spend that salary?
• How much do you end up with?
• What do you do with that excess?
Types of Accounting Information
• Essentially backward looking

Financial • Mainly concerned with record
Accounting keeping
• used by external users
• To aid management’s
Management decisions and planning
Accounting • concerned with the future
• used by internal users
What is Accounting?
• "the process of identifying, measuring and communicating
economic information to permit informed judgments and
decisions by users of the information! “ - Frank Wood
(1967)
The Role of the Accountant
An accountant’s work helps to answer many questions such as:
1) What is the value of the business, and is the business
becoming more valuable or less valuable over time?
2) Who does the business owe money to and how much is
owed?
3) Who owes money to the business and how much is owed?
4) How much cash does the business have available to
spend?
5) Does the business have any unsold inventory of goods, and
if so what could they be worth?
6) Is the business making a profit?
7) How much does it cost to produce the goods or services
being sold?
The Accounting Process
Collect
Data
Forecast Classify
& Plan &
Record
Interpret &
Communicate Summarize
Who uses accounting information?
• Owners
• Managers
• Lenders
• Competitors
• Government
• Employees
Terminology
• Business entity concept recognizes that the transactions of a
business should be recorded separately from the transactions
of its owner. This principle should be followed even if the
business is not a separate legal entity.
• Matching concept requires expenses to be matched to the
revenue that they have generated.
• Historic-cost concept requires transactions to be recorded at
their original cost to the business, and as a result, the assets of
a business are included at their historic cost on the statement
of financial position.
• Going-concern concept means that, when producing accounts,
there is an assumption that the business will continue to
operate for the foreseeable future unless there is any evidence
to suggest that it will not.
• Prudence Concept requires that, when accounts are being
prepared, income should never be anticipated, but all possible
costs should be taken into account. This means that a cautious,
but realistic, approach should be taken to ensure that profits
are not overestimated.
Terminology
• Capital is the amount the owner has invested in a business.
• Inventories (stock) are goods for resale held in stock by the

business.
• Income is the amount earned by the business, usually from

sales
• Expenses are costs incurred by the business or organization

in order to enable the business to trade.
• Drawings are the amount taken out of the business for the
owner’s personal use.
Terminology
• An asset is something that the business owns that will bring financial
benefits to the business in the future.
▫ Non-current assets are assets intended for long-term use in the
business.
▫ Current assets are assets that will be held by the business for less
than one year, including inventory held for resale and cash
balances.
▫ An intangible asset is an asset without any physical substance.
Examples include goodwill and brand names.
• A liability is an amount owed by the business where the business has

an obligation to make a payment.
▫ Non-current liabilities are amounts that are due to be paid after a
year, including long-term loans.
▫ Current liabilities are amounts that are due to be paid within a year,
including amounts owed to suppliers.
Terminology
• Sales - the income earned from selling goods or services.
Sales
Cash Credit
−Cash sales are made when the cash is received at the

same time as the goods or services are delivered.
−Credit sales are made when the payment is received
after the goods or services have been delivered.
Terminology
Credit
Debtors Receivables
Customers
• Receivables - amounts owed by customers of the

business who, having been sold goods or services on
credit, have not yet paid the business
Terminology
• Purchases - the costs incurred by the business or organization in
buying the goods it plans to sell to its customers.
Purchases
Cash Credit
−Cash purchases are those purchases for which cash payment

will be made at the same time as the goods or services are
received.
−Credit purchases are those purchases where the goods or
services have been received by the business but for which
payment is made at a date after the goods services have been
delivered.
Terminology
Credit
Creditors Payables
Suppliers
• Trade payables are the amounts owed to suppliers of the

business who, having supplied goods or services on credit,
have not yet been paid by the business.
Terminology
• Capital expenditure refers to expenditure where the
business will benefit for more than one accounting period.
For example, the purchase of a delivery van or building.
• Revenue expenditure relates to expenditure for day-to-day

expenses. For example, telephone or staff salary costs
• Revenue income will be mainly income from sales. Other

examples are rent received and interest received.
• Capital income includes money invested by the owner of

the business and loans from third parties.
The Accounting Process
A Summary of the Accounting Process
1. TRANSACTIONS and DOCUMENTS
DOCUMENTS – Source of all accounting information
:The (Prime) Document Cycle
2. ENTERING TRANSACTIONS INTO THE ACCOUNTS
BOOK-KEEPING – Recording all accounting transactions in the LEDGERS
: Recording all sales transactions (Customers, Receivables)
: Recording all purchase transactions (Suppliers, Payables)
: Recording all the businesses receipts and payments
: Recording all other transactions - expenses, assets,
liabilities & capital
3. EXTRACTING REPORTING INFORMATI ON

: Income Statement – how much PROFIT has been made?
: Statement of Financial Position - a summary of business’s value or ‘net
worth’
: Account Histories – expenses, receivables and payables
: Management Information – cost and income information
The Accounting Equation:
• The whole of financial accounting is based on this very simple

idea
• Resource provided by the owner = Resource in the business
• In accounting term the resource provided by the owner is
know as “capital” and resource in the business is known as
“assets”.
Capital = Assets
• However people other than the owner who have supplied
some of the assets it are known as “liabilities”. The accounting
equation has now changed to:
Capital = Assets – Liabilities
Or
Assets = Capital + Liabilities
Questions
1)Classify the following items into liabilities and assets:
(a) Motor vehicles (f ) Overdraft Owing to bank
(b) Premises (g) Cash in hand
(c) Creditors for goods (h) 5year Loan from D Jones
(d) Stock of goods (i ) Machinery
2)Complete the gaps in the following table:

Assets Liabilities Capital
£ £ £
(a) 55,000 16,900 ?
(b) ? 17,200 34,400
(c) 36,100 ? 28,500
(d) 119,500 15,400 ?
(e) 88,000 ? 62,000
(f ) ? 49,000 110,000

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Introduction to

Accounting & Finance

• Accounting is a form of record keeping that focuses on the

• Essentially backward looking

• Inventories (stock) are goods for resale held in stock by the

• Income is the amount earned by the business, usually from

• Expenses are costs incurred by the business or organization

• A liability is an amount owed by the business where the business has

−Cash sales are made when the cash is received at the

• Receivables - amounts owed by customers of the

−Cash purchases are those purchases for which cash payment

• Trade payables are the amounts owed to suppliers of the

• Revenue expenditure relates to expenditure for day-to-day

• Revenue income will be mainly income from sales. Other

• Capital income includes money invested by the owner of

3. EXTRACTING REPORTING INFORMATI ON

• The whole of financial accounting is based on this very simple

2)Complete the gaps in the following table:

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