ACCT 301 Chapter Notes - Chapter 1: Companies Act 1985, Financial Statement, Management Accounting
Accounting is a way of recording, analyzing, and summarizing transactions of a
Transactions are recorded in books of prime entry, and then analyzed and posted to
the ledgers and finally they are summarized in the financial statements.
Yet, the term ‘Accounting’ not only refers to Financial Accounting, but moreover,
a) Management Accounting
b) Financial Management
The Purpose, of going through the process of preparing financial statements, may not
be required or needed by most companies, yet some must comply to do so by law.
Nonetheless, they are prepared so that owners, managers, lenders and other
interested parties can see how the business is doing. In other words, to provide
information about the financial position, performance and financial adaptability of an
enterprise that is useful to a wide range of users.
Depending on the users of financial statements, many may require access to different
information, but all share some basic needs. Some of the basic users of financial and
accounting information are:
c) Trade contacts
d) Providers of Finance
e) Governments and their Agencies, e.g. Inland Revenue and Registrar of
g) Financial Analysts and Advisors
h) Investors/ Public
As one may imagine, it may be very hard to satisfy all of the different users, yet, the
basic financial statements at the end of the day, are:
a) The Profit and Loss Account
b) The Balance Sheet
Furthermore, some companies may be required to produce annual reports, which
Non-Financial Statements, such as:
a) Director’s Report
b) Auditors’ Report
c) Chairman’s Report
Limited companies are required by law to prepare and publish accounts annually. The
form and content of the accounts are regulated primarily by the Companies Act 1985,
but must also comply with accounting standards.
The Regulatory System
Basically the Company Law requires that all companies must comply with the
Companies Act. Of the many requirements and regulations, it must be brought to one’
s attention, that the Financial Statements are required to represent a True and Fair
view of the state of affairs and Profit and Loss.
The Accounting Standard’s Board, previously known as the Accounting Standard’s
Committee, has issued the Accounting Standards, such as FRS’s and SSAP’s. The
accounting standards were developed with the aim of narrowing the areas of
difference and variety in accounting practice.
The Urgent Issues task force is an important part of the ASB in that it is required to
tackle urgent matters not covered by existing standards. The review panel is
concerned with the examination and questioning of departures from accounting
standards by large companies.
Furthermore, the companies are required to follow the Accounting Policies, set out in
FRS 18 and the Companies’ Act. Those policies are summarized in the diagram
above, but it must be noted that there is a distinction between the accounting policies
and accounting estimates.
The accounting policy is concerned with:
a) the recognition
b) Selection of measurement base and
Of assets, liabilities, gains and losses of an entity. E.g. ‘Prudence or Accruals’? The
choice must be based on which may provide the most true and fair view.
The accounting estimate is the method used to establish the monetary value of
assets, liabilities, gains and losses using the measurement base selected by the
e.g. depreciation (straight line or reducing balance?)
The ASB also developed a Statement of Principles, which is concerned by:
a) the objective of financial statements
b) the reporting entity
c) The qualitative characteristics of financial information.
Basically the statement of principles provided a Conceptual Framework, which forms
the theoretical basis for determining which events should be accounted for, how they
should be measured and how they should be communicated to the user. A conceptual
framework is a statement of generally accepted theoretical principles, which form the
frame of reference for financial reporting. These theoretical principles provide the
basis for the development of new reporting standards and the evaluation of those
already in existence. In other words, they are there to provide consistency, clarity and
Furthermore, companies are required to comply with the regulations of the European
Union, and various international bodies, and any stock exchange requirements
depending on their circumstances.
In addition to the Financial Statements, limited companies are required to provide
certain notes and disclosures to the accounts, such as:
1. Statement of movements in reserves
2. Details of Fixed Assets
3. Details of post balance sheet events
4. Details of contingent liabilities and contingent assets
5. Details of research and development expenditure.
6. Statement of total recognized gains and losses.
7. Note on historical cost profits and losses.
The following are the important features of Financial Statements
1- Relevance 3-Reliability 5-Objectivity 7-Comparability
2-Comprehensibility 4-Completeness 6-Timeliness
The Qualitative Characteristics of Financial Statements
a) Relevance – Info that has the ability to influence decisions, Predictive Value,
b) Reliability – Info that is complete and faithful representation. Free from material
error, faithful representation, neutral, complete, and prudence.
a) Comparability – similarities and differences can be discerned and evaluated.
Consistency and Disclosure.
b) Understandability – the significance of the information can be perceived. Users’