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Financial Reporting Mechanism Notes

Accounting Notes > Accounting (Special Edition) Notes

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Financial Reporting Mechanism http://www.youtube.com/watch?feature=player_embedded&v=iKHKaQJVeJk

Definition Financial Reporting Mechanics is a system of concepts and principles that supports the preparation of financial statements. In other words Financial Reporting Mechanics are the detailed guidelines for accountants who prepare the financial statements, these mechanics supports in the preparation of F/S.

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Why is it important?
Most preparers and users of F/S identifies that there is a need for a certain reporting mechanism and that this can be useful in following ways help the accounting bodies to set accounting standards assist the national accounting bodies to develop accounting standards for their country provide guidance to accountants in preparing financial statements (F/S) help auditors to form an opinion assist users in understanding F/S Note: Accounting standards is a separate topic, see the relevant lesson Lecture Notes The five elements The Financial reporting mechanics identifies three elements relating to the statement of financial position, being assets, liabilities and equity, and two relating to the income statement, being income and expenses. The definitions and recognition criteria of these elements are very important and these are considered in detail below . (given by International accounting framework) An asset is defined as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Assets are presented on the statement of financial position. Examples of assets include long lived assets, Debtors (receivables) and inventory. A liability is defined as an obligation of the entity arising from past events. Liabilities are also presented on the statement of financial position Examples of liabilities include trade payables, tax payable and loans. Equity is defined as the residual interest in the assets of the entity after deducting all its liabilities. Equity includes the original capital introduced by the owners, ie share capital and share premium, the accumulated retained profits, i.e. retained earnings. Income is defined as the increases in economic benefits during the accounting period in the form of inflows. Most income is revenue generated from the normal activities of the business in selling goods and services Expenses are defined as decreases in economic benefits during the accounting period in the form of outflows. Examples of expenses include depreciation, rent, insurance and purchases.

The Accounting Equation Assets = Liabilities + Capital Example: Assets = Liabilities + Capital 1000 = 200 + 800

Expanded Accounting Equation (Noncurrent Assets + Current Assets) = (Noncurrent Liabilities + Current Liabilities) + (Opening capital + profit - drawings) Example: Noncurrent Assets Current Assets Noncurrent Liabilities 2000 Current Liabilities Opening capital profit for the year drawings10000 10000 12000 35000 12000

Solution: Rearrange the equation Noncurrent assets = (Noncurrent Liabilities + Current Liabilities) + (Opening capital + profit drawings) - Current Assets Noncurrent assets = (2000 + 10000) + (12000 + 35000 - 12000) - 10000 Noncurrent assets = 37000 There are many ways of presenting accounting equation but the equation must be balanced on both sides. Double Entry Bookkeeping According to dual aspect concept of accounting, every financial transaction has equal effects in at least two different accounts. It is used to satisfy the equation Assets = Liabilities + Equity There are two sides in bookkeeping known as DEBIT and CREDIT, following summary will help to understand which items to be recorded on debit / credit Debit Credit Increase in Asset decrease in Asset

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