Back to: Financial Accounting
Welcome, everyone!
Hope you’re all settling in well for your second year. This semester, we’ll be diving deeper into Accounting, building on the fundamentals you covered in your first year. Whether you’re feeling confident or a bit rusty, don’t worry—this course is designed to strengthen your understanding and apply it to real-world business situations. Let’s get started.
Introduction to Financial Accounting
At its core, financial accounting is about recording, summarising, and reporting financial transactions. The aim is to provide information that is useful to external users such as investors, creditors, and regulators. These users rely on accurate financial reports to make decisions.
We’ll focus on understanding the framework of accounting, particularly:
The accounting equation
Double-entry bookkeeping
Financial statements and their components
The Accounting Equation
This fundamental concept is the backbone of all accounting systems:
Assets = Liabilities + Owner’s Equity
This equation must always be balanced. Every transaction affects at least two accounts, which is where double-entry bookkeeping comes in.
Let’s take a simple example:
If a business buys a computer for £1,000 using cash, the asset ‘Equipment’ increases by £1,000 and the asset ‘Cash’ decreases by £1,000. The total value of assets hasn’t changed, so the equation remains balanced.
The Double-Entry System
Every financial transaction has two sides: a debit and a credit. These aren’t always what we casually think they are—here’s a general rule to help:
Assets: Increase with a debit, decrease with a credit
Liabilities and Equity: Increase with a credit, decrease with a debit
Expenses: Increase with a debit
Revenue: Increases with a credit
Think of it as a system of balance and checks—each entry must have a corresponding entry to keep the books in equilibrium.
Financial Statements Overview
There are four main types of financial statements you’ll need to understand:
Statement of Financial Position (Balance Sheet)
Shows the assets, liabilities, and equity of a business at a particular point in time.
Income Statement (Profit or Loss Statement)
Reports revenue and expenses over a period, showing the profit or loss for that time.
Cash Flow Statement
Tracks the flow of cash in and out of the business, divided into operations, investing, and financing activities.
Statement of Changes in Equity
Reflects movements in the owner’s equity over the reporting period, including retained earnings and investments.
These statements give different perspectives but are interconnected.
Accruals vs. Cash Accounting
It’s important to understand the difference between these two methods:
Cash accounting records income and expenses when cash is received or paid.
Accrual accounting recognises income when it is earned and expenses when they are incurred, regardless of when cash is exchanged.
Most businesses use the accrual method, as it provides a more accurate picture of financial performance.
Depreciation and Asset Valuation
Assets lose value over time, and this decrease is called depreciation. It’s a way of allocating the cost of an asset over its useful life. There are several methods to calculate depreciation, but the most common are:
Straight-line method: Equal amount each year
Reducing balance method: Higher depreciation in early years
Understanding how to apply depreciation is key to accurate financial reporting.
Internal Controls and Ethics
As you move into more advanced topics, you’ll see that accounting isn’t just about numbers. It’s about trust, transparency, and control. Businesses must implement internal controls to safeguard assets and ensure that financial information is accurate and reliable.
We’ll also explore ethics in accounting—a growing area of importance, especially given recent corporate scandals. Integrity, objectivity, and professional competence are central to ethical behaviour in the profession.
Summary
This semester will challenge you to think critically about how financial information is prepared and used. Try to relate the concepts to actual businesses you know or work in. Always ask “why” and “how” behind the numbers.
Don’t stress if you find certain topics tricky at first—ask questions, collaborate with classmates, and use the resources available. You’re here to learn, and every question is a step forward.
Looking forward to a great semester together!