ACCOUNTING FOR BUSINESS (AFB)

RATIONALE: This module covers the nature and role of accounting and the processes used to
record and present accounting information. Students will learn to prepare company financial
statements, including statements of financial position, profit or loss, and other comprehensive
income and cash flows for single entities. The module will enable students to evaluate, analyse and
discuss financial performance. This module provides participants with a solid grounding in all aspects
of management accounting, including the importance of cost behaviour and different cost
accounting techniques such as marginal and absorption costing. Students will develop skills in
analysis and interpretation of numbers for decision-making purposes.

AIMS: The module aims to develop a comprehensive understanding of fundamental concepts and
techniques in financial and management accounting, including the ethical issues at stake in providing
a `true and fair view` in public reporting so as to support and maintain good business practice and
sustainable financial markets. It also provides students with the opportunity to use and apply
financial and accounting concepts, constructs and frameworks in support of business problem
appraisal and decision making.

INDICATIVE CONTENT OF THE MODULE INCLUDES:

 The environment of accounting and the accountant's role in the organisation.

 Accounting concepts and policies including the 'true and fair view' and the ethical
requirements to support sustainable financial markets with good information.
 Income statement; the statement of financial position; cash flow; financial statements.
 Interpretation and evaluation of accounts. Ratios, comparisons and trends.
 An introduction to financial management.
 Investment appraisal and return on investment.
 An introduction to cost and management accounting, including marginal and absorption
costing.
 Budgeting and budgetary control, including the behavioural implications of budgeting

ASSESSMENT

Component number Form of assessment Assessment size Weighting (%)

1 Individual Assignment 1000 words 30
2 End of term examination 3 hours (open 70
book)

INDICATIVE READING

 Introduction to Financial Accounting, 8th edition, Thomas, A. and Ward, A. M. (2015);

London: McGraw Hill Education.
 Atrill & McLaney (2017) Accounting and Finance for Non-specialists 10th Ed, by,
Pearson.
 Wood, F & Sangster, A (2011), Business accounting I, 12th edition, Prentice Hall Wood, F
& Sangster, A (2011), Business accounting II, 12th edition, Prentice Hal
  Atrill, P. and McLaney, E., (2012). Management accounting for decision makers. 7th
edition
 Accounting for Non-Accounting Students, 9th edition, J.R. Dyson, (2017)

AFB – Week 1

ACCOUNTING FOR BUSINESS

LECTURE SEQUENCE
1. Introduction and Overview
2. Introduction to Financial Accounting – Conceptual framework;
Accounting process; Double entry system & applications to
business transactions; Accounting equation; Trial balance
preparation.
3. Basic financial statements for a sole trader.
4. Financial statements with adjustments for accrual,
prepayments and depreciation
5. Financial statements with more adjustments to include
accounting for bad and doubtful debts.
6. Financial statements for companies.
7. Users of financial statements.
8. Accounting ratios and its use in financial performance analysis.
9. Introduction to Management Accounting - Cost classification;
cost behaviour; applications to product & service costing.

10. Cost- volume -profit analysis.

11. Decisions making scenarios (short-term)
12. Decision making scenarios (long term)/ Investment appraisal
13. Budgeting and cash budgets.
14. Revision and Review.
All students must keep up with the weekly work in order to
progress well and benefit from the lectures. This is a practical
module and requires application on your part. Students may
contact me on: sa.palan@lsclondon.co.uk with your
questions
and I will do my best to respond asap or within a day. Be
consistent with your work and success will follow. Thank
YOU.

An introduction to financial accounting & financial

statements/final accounts

1. Influences upon financial accounting/reporting/financial

statements:
These can be grouped into the following:
 National law – the form and content of accounts may be
regulated by national legislation. ‘Fair presentation’
 Accounting standards – The International Accounting
Standards Board (IASB) produces accounting standards.
These helps tackle issues/interpretation of standards.
 Accounting concepts and individual judgement –
Accounting policies have developed over the centuries.
These are based on generally accepted concepts:
business entity concept, going concern, accruals,
prudence, consistency, materiality, substance over form
and more.
 GAAP – Drawn from local company law, accounting
standards, statutory requirements in other countries
and the stock exchanges (e.g. LSE)
2. The main financial statements are:
 Income Statement and

 Statement of Financial Position (SOFP)

Sometimes these are also collectively referred to as the

‘final accounts’

Be aware of old and new terminology used in various

published materials in financial accounting - texts, articles etc

Old terminology New terminology

Profit statement Income statement
Balance sheet Statement of financial position
(SOFP)
Stock Inventory
Debtors Receivables
Creditors Payables
Fixed assets Non-current assets
Long term liabilities Non-current liabilities

3. Conceptual framework - Accounting concepts/principles:

 These are principles/rules used in the preparation, use
and interpretation of financial statements.
 Evolved over time; adopted for practical rather than
theoretical purposes
 Not a rigid code – application of these concepts (via the
choice of alternative accounting policies) are often
subjective; a question of individual judgement/choice.
  Hence financial accounting/reporting/preparing financial
statements is not an exact science?

 There are several accounting concepts. the first (and not

the most important) of these is the business entity
concept: The entity is treated as separate from its
owners. Personal transactions of the owners separated
from the transactions of the business.

4. Some accounting terminology used in financial

accounting
 Asset: Something valuable which an entity owns or has
use of e.g. a factory, motor vehicles, inventory for
resale, receivables (amounts owed by customers), bank
and cash balances.
 Liability: What the entity owes somebody else (other
than the owner/owners) e.g. bank loan; payables
(amounts owed to the suppliers);
 Capital: What the entity owes (cash/assets) the sole
trader/owners. (for companies the owners are the
shareholders)

5. Accounting equation: (based on the business entity

concept)
 What the business owns = What the business owes at
any point in time of the business.
 Assets (owns) = Liabilities + Capital (both are what the
business owes)
The accounting equation underpins the entire accounting
system. Here are some simple examples to show how the
accounting equation works by examining a series of
transactions through a period of time.

Transaction 1: Mrs A starts a business. She brings in cash of

£4,000 and banks £36,000.
Assets (Cash £4,000 + Bank £36,000) = Capital £40,000

Transaction 2: Mrs A purchases equipment for the business

for £9,000; paid for it with cash of £1000 and £8,000 by bank
transfer.
Assets (Cash £3,000 + Bank £28,000 +Equipment £9,000)
= Capital £40,000

Transaction 3: Purchased inventory of goods for resale on

credit for £2,000.
Assets (Cash £3,000 + Bank £28,000 +Equipment £9,000 +
Inventory £2,000) = Capital £40,000 + Payables £2,000

Transaction 4: Banked £1,000 of the cash.

Assets (Cash £2,000 + Bank £29,000 +Equipment £9,000 +
Inventory £2,000) = Capital £40,000 + Payables £2,000

Transaction 5: Paid cash £1,000 for purchase of inventory of

goods for resale.
Assets (Cash £1,000 + Bank £29,000 +Equipment £9,000 +
Inventory £3,000) = Capital £40,000 + Payables £2,000
Transaction 6: Paid the supplier for the earlier credit
purchase of inventory £1,000 by bank transfer.
Assets (Cash £1,000 + Bank £28,000 +Equipment £9,000 +
Inventory £3,000) = Capital £40,000 + Payables £1,000

Transaction 7 [Dated 1st July 2021): Obtained a bank loan of

£6,000 repayable in 5 years’ time. This was banked.
Assets (Cash £1,000 + Bank £34,000 +Equipment £9,000 +
Inventory £3,000) = Capital £40,000 + Payables £1,000 +
Bank loan £6,000.

A statement can now be produced for Mrs A’s business

entity to represent all the above seven transactions.
Mrs A
Statement of Financial Position as at 01/07/2021
£ £
Non-current asset
Equipment 9,000
Current assets
Inventory 3,000
Bank 34,000
Cash 1,000 38,000
Total assets 47,000

Capital 40,000
Non-current liability
Bank loan 6,000
Current liability
Payables 1,000
 Capital and liabilities 47,000

The above ‘Statement of Financial Position’ or SOFP also

reflects the accounting equation i.e. Total assets (what the
business entity owns) = Capital (what the entity owes the
owner Mrs A) + Liabilities (what the entity owes the others)

6. Other accounting concepts: There are several other

accounting concepts and these will be brought together as
we progress through the preparation of final accounts: going
concern, accruals, prudence, consistency, materiality,
substance over form and more.
Please research these before the next lecture. (your
homework, please)
------------------------------------------------------------------------------

Requirements for preparing the final accounts

In order to prepare the final accounts (an Income Statement

and a Statement of Financial Position) the following are
required:
 A trial balance - a list of accounts with their balances at
the end of an accounting period.
 Year-end additional information - required to adjust
some of these accounts in the trial balance provided.

A trial balance

1. In a trial balance there are several accounts with their

balances - some of these accounts have debit balances and
others have credit balances.
2. Why do these accounts have either debit or credit
balances? This is the result of applying the double entry
system in recording business transactions (or double entry
bookkeeping).
 Each business transaction has a dual effect on the
accounts (or every business transaction has two equal
but opposite effects)
 All business transactions must be entered in the
accounts using the double entry system: a debit entry in
one account and an equal but opposite credit entry in
another account.
 Periodically (monthly or yearly) the accounts are
balanced off. Balancing of all these accounts periodically
will result in each of these accounts having a either a
debit or a credit balance. A listing of these accounts and
their balances (debit or credit) is called the trial balance.

3. The correct application of the double entry system should

enable the trial balance to balance (i.e. mathematically the
total of debit balances = total of credit balances; since for
each debit entry there is a corresponding credit entry in the
ledger accounts).

4. Sometimes mistakes/errors are made in the application of

the double entry system and this may produce one of these
two effects on the trial balance:
 Errors that affect the trial balance (resulting in the trial
balance totals not being equal or balancing). For
example, posting a single entry (instead of double
 entries) for a transaction will affect the trial balance
totals.
 there are also errors that will not affect the trial balance
totals. For example, a simple case in point is the
complete omission (i.e. not accounted for) of a business
transaction; this omission will still enable the trial
balance to balance (i.e. trial balance totals will agree).

5. The trial balance needs to balance before the final

accounts can be prepared. However, bear in mind that a
balancing trial balance does not mean it is free of errors as
explained in (4) above.

6. There are 5 types of accounts within the trial balance:

 Incomes e.g. Sales, rental income, interest received etc
 Expenses e.g. Wages and salaries, purchases (of goods
for resale), rent, rates, insurance etc
 Assets (what the business owns) e.g. Machinery, shop
fittings, inventory, bank and cash balances, trade
receivables etc
 Liabilities (what the business owes others) e.g. Bank
loan, trade payables, accruals etc
 Capital (what the business owes the owner)

7. All assets and liabilities can be classified into non-current

or current.
 Non- current assets are owned and used by the entity
for more than one year (i.e. they are fixed financially for
more than one year). Examples: Land, buildings,
factories, plant and machinery, motor vehicles, fixtures
& fittings
  Current assets are owned by the entity and change
financially within a period of one year. Examples:
inventories, trade receivables, prepayments, bank and
cash balances.
 Non-current liabilities are what the business owes and
require settlement beyond a year (owed for more than
one year). Examples: long term bank loan, debentures
or bonds (in the case of companies).
 Current liabilities are what the business owes and
require settlement within a year. Examples: trade
payables, short term bank loans, bank overdraft,
accruals, taxation (for companies).

Example 1
Let us use the example below to classify the following
accounts into these types:
Revenues/incomes (I);
Expenses (E);
Current assets (CA);
Non-current assets (NCA);
Current liabilities (CL);
Non-current liabilities (NCL)
Capital (C)

The following trial balance is for a sole trader, A, as at

30 June 2019.
Dr Cr
£000 £000
Sales - I 146
Purchases-E 60
Inventory at 1 July 2018 - CA 5
Vehicle running expenses - E 3
Rent and business rates - E 14
Office expenses - E 8
Wages and salaries- E 43
Shop fittings – cost - NCA 25
Shop fittings–accumulated depreciation- CONTRA 11
NCA
Vehicles- cost - NCA 35
Vehicles-accumulated depreciation – CONTRA NCA 12
Trade receivables- CA 6
Trade payables - CL 5
Capital - C 31
Drawings – CONTRA C 11
Bank - CA 2
Cash- CA 1
Long term bank loan - NCL 8
Totals 213 213

Example 2: (homework)
Please attempt before the next lecture – remember making
mistakes is part of learning.

Classify the account balances into: revenues/incomes (I),

expenses (E), current assets (CA), non-current assets (NCA),
current liabilities (CL) and non-current liabilities (NCL) and
capital (C).
 The following account balances were extracted as at
31/12/2019 from the books of B, who owns a retail business.

£000 £000
Sales 1860
Purchases 1120
Inventory at 1/1/2019 60
Trade receivables 64
Trade payables 176
Business rates 41
Insurances 40
Heating and lighting 55
Motor running expenses 27
Selling expenses 172
Long term bank loan 200
Interest on bank loan 4
Land and buildings at cost 850
Motor vehicles at cost 70
Motor vehicles – accumulated depreciation 20
Wages and salaries 295
Bank 3
Cash 1
Capital 600
Drawings 54
Totals 2856 2856
Notes as at 31 December 2019
• Inventory was valued at £65,000
• Wages accrued £5000 -- OWING
• Heating and lighting accrued £2000
• Business rates prepaid £3000
• Motor vehicles depreciated at 20% pa on cost

Required:
(a) Income statement for the year ended 31 December 2019.
(b) Statement of financial position as at 31 December 2019.

END OF LECTURE 1 NOTES