F3 - ACCA Chapter-1-1

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Chapter 1:
Introduction to accounting
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What you will learn?

 The purpose of financial reporting
 Types of business entity
 Natures, principles and scope of financial

reporting
 Introduction to financial statements
 Those changed with governance

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The purpose of financial reporting
Financial reporting is a way of recording, analysing and

summarising financial data
Actual transactions (sales of goods, purchases of

goods,...) are recorded in books of prime entry.
The transactions are analysed in the books of prime

entry and the totals are posted to the ledger accounts.
Finally, the transactions are summarised in the financial

statements.
4
Types of business entity

Main types of business entity
A business owned and run by one

individual, perhaps employing one or
Sole traders
two assistants and controlling their
work
Limited the business’s debts and personal

liability debts of the business’s owners
companies (shareholders) are legally separate
 Arrangements between
individuals to carry on business in
Partnerships
common with a view to profit
 Involves obligations to others
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Exam focus point
Which of the following are TRUE of partnerships?

1 The partners’ individual exposure to debt is limited.
2 Financial statements for the partnership by law must be
produced and made public.
3 A partnership is not a separate legal entity from the partners
themselves.
A. 1 and 2 only B. 2 only
C. 3 only D. 1 and 3 only

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Exam focus point
C. 3 only
 Unless a partnership is a limited liability partnership, the

partners’ individual exposure to debt is not limited because
the partnership is not a separate legal entity from the
partners themselves.
 Financial records must be maintained by a partnership, but

there is no requirement to make them publicly available
unless the partnership is a limited liability partnership.
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Natures of financial reporting

In comparison with management accounting
Financial Accounting Management Accounting
Communication of financial
Purpose Decision making
position
Requirement Mandatory Optional
External Internal
Primary audience (Investors, Regulators, Tax (Management& decision
authorities, etc.) makers)
Regulations/
GAAP, IFRS, IAS None
guidelines
Quarterly, annual or per
Frequency As needed and ongoing
period
External review Auditors, regulators None
Information to aid
Focus Past transactions
decisions for the future
Narrow per segment,

Scope Company wide
product, etc. As needed.
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Users’ and stakeholders’ needs

Business stakeholders
Business stakeholders
Internal External
Owners Creditors
(sole traders/
partnerships)
Trade contacts
Shareholders
Tax authority
Government
Managers
Financial analysts
Employees
Society
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Needs to use financial statements
Types Comments
Shareholders For investment decisions
Managers For planning and making decision
To access company’s ability in providing

Employees
remuneration, employment opportunities...
Creditors Interested in the security of their loan
 Suppliers: To evaluate company’s long term

Trade health and liquidity position
contacts  Customers: To secure the sources of supply
for themselves
Financial Interested in profit performance and estimates of

analyst future operations
Allocation of resources and activities of

Government
enterprises trends within the economy
Entities effect: Members of the public and the

Society
environment (pollution)
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Exam focus point
Which group of people are most likely to be interested in

the financial statements of a sole trader?
1 Shareholders of the company
2 The business’s bank manager
3 The tax authorities
4 Financial analysts
A. 1 and 2 only B. 2 and 3 only
C. 2,3 and 4 only D. 1,2 and 3 only

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Exam focus point
B. 2 and 3 only
 A sole trader does not have any shareholders.

 The financial statements are unlikely to be of interest to a
financial analyst, they are more usually interested in the
financial statements of public companies
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Governance
Responsible for preparation of financial

statements
Main aim: To create wealth for

shareholders
Must act honestly in best interests of

Directors
company
Fiduciary position
Duty of care to show reasonable

competence
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Governance
Exam focus point
Which of the following statements is/are true?

1 Directors of companies have a duty of care to show reasonable
competence in their management of the affairs of a company.
2 Directors of companies must act honestly in what they
consider to be the best interest of the company.
3 A Director’s main aim should be to create wealth for the
shareholders of the company.
C. 1,2 and 3 D. 1 and 3 only

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Governance
Exam focus point
Which of the following statements is/are true?

1 Directors of companies have a duty of care to show reasonable
competence in their management of the affairs of a company.
2 Directors of companies must act honestly in what they
consider to be the best interest of the company.
3 A Director’s main aim should be to create wealth for the
shareholders of the company.
C. 1,2 and 3 D. 1 and 3 only

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Main elements of financial reports

Content in financial statements
Financial Statements
Statement of Financial Position (SOFP)
Statement of Profit or Loss (and Other Comprehensive

Income) (SPL or SPLOCI)
Statement of Cash Flows (SOCF)
Statement of Changes in Equity (SOCIE)
Notes to the Financial Statements

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Statement of financial position
A list of all the assets owned and all the liabilities owed by a
business as at a particular date
LIABILITIES
ASSETS  Non-current liabilities
 Non-current assets - Long-term borrowings
- Properties, plant and  Current liabilities
equipment (PPE) - Trade and other payables
- Bank overdraft
- Other NCA
- Taxation
 Current assets - Other CL
- Cash and cash Present obligation arising from
equivalents past events and expected
Inventories outflow economic benefits
- Other CA
Resource controlled by EQUITY

entity as a result of past  Share capital/premium
events and future  Retained Earnings (RE)
 Reserves
economic benefits are
Residual interest in the assets
expected after deducting all liabilities
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Statement of financial position
STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20X7

$ $
Assets
Plant and machinery 55,000
Inventory 5,000
Receivables (from customers) 1,500
Cash at bank 500
7,000
Total assets 62,000
Liabilities
Bank loan 25,000
Payables (to suppliers) 1,600
Equity
Balance brought forward 25,000
Profit for the year 10,400

Balance carried forward 35,400
Total liabilities plus equity 62,000
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Statement of profit or loss
 A record of income generated and expenditure incurred

over a given period
 The statement shows whether the business has had
more revenue than expenditure (a profit) or vice versa
(loss)
increases in economic benefits during the

accounting period in the form of inflows or
Income
enhancements of assets or decreases of
liabilities that results in increases in equity
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Statement of profit or loss
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 APRIL 20X7
$
Revenue 150,000
Cost of sales 75,000
Gross profit 75,000
Other expenses 64,600
Profit for the year 10,400
Revenue arises in the course of the

Revenue
ordinary activities of an entity
decreases in economic benefits during the

accounting period in the form of outflows or
Expenses
depletions of assets or incurrences of
liabilities that results in decreases in equity

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1

What you will learn?

 Types of business entity

 Natures, principles and scope of financial

 Introduction to financial statements

 Those changed with governance

The purpose of financial reporting

Financial reporting is a way of recording, analysing and

Actual transactions (sales of goods, purchases of

The transactions are analysed in the books of prime

Finally, the transactions are summarised in the financial

Types of business entity

A business owned and run by one

Limited the business’s debts and personal

Types of business entity

Which of the following are TRUE of partnerships?

A. 1 and 2 only B. 2 only

C. 3 only D. 1 and 3 only

Types of business entity

 Unless a partnership is a limited liability partnership, the

 Financial records must be maintained by a partnership, but

Natures of financial reporting

Financial Accounting Management Accounting

Narrow per segment,

Users’ and stakeholders’ needs

Users’ and stakeholders’ needs

Shareholders For investment decisions

Managers For planning and making decision

To access company’s ability in providing

Creditors Interested in the security of their loan

 Suppliers: To evaluate company’s long term

Financial Interested in profit performance and estimates of

Allocation of resources and activities of

Entities effect: Members of the public and the

Users’ and stakeholders’ needs

Which group of people are most likely to be interested in

A. 1 and 2 only B. 2 and 3 only

C. 2,3 and 4 only D. 1,2 and 3 only

Users’ and stakeholders’ needs

 A sole trader does not have any shareholders.

Responsible for preparation of financial

Main aim: To create wealth for

Must act honestly in best interests of

Duty of care to show reasonable

Which of the following statements is/are true?

A. 1 and 2 only B. 2 only

C. 1,2 and 3 D. 1 and 3 only

Which of the following statements is/are true?

A. 1 and 2 only B. 2 only

C. 1,2 and 3 D. 1 and 3 only

Main elements of financial reports

Statement of Financial Position (SOFP)

Statement of Profit or Loss (and Other Comprehensive

Statement of Cash Flows (SOCF)

Statement of Changes in Equity (SOCIE)

Notes to the Financial Statements

Main elements of financial reports

Resource controlled by EQUITY

Main elements of financial reports