Financial Accounting cheat sheet

Key terms

Local

ICPAK is the local professional body: it admits and licenses members, issues practice notes, adopts IFRS and IPSAS for use in Kenya, and runs the disciplinary process for breaches of its code of ethics.

International bodies

The International Federation of Accountants (IFAC), of which ICPAK is a member body, sets the International Code of Ethics through its Ethics Board and coordinates standard-setting globally; the International Accounting Standards Board (IASB) is the body ICPAK looks to directly for IFRS and IAS.

International Financial Reporting Standards (IFRS)

The current generation of standards issued by the IASB for profit-oriented entities, IFRS 15 (revenue), IFRS 16 (leases) and IFRS 9 (financial instruments) among them.

International Accounting Standards (IASs)

The standards issued by the IASB's predecessor body before 2001, several of which, IAS 1 (presentation), IAS 16 (property, plant and equipment) and IAS 2 (inventories) among them, remain in force today, renumbered but not replaced by later IFRSs.

International Public Sector Accounting Standards (IPSAS)

Standards issued by the IPSAS Board specifically for governments and public sector entities, adapting IFRS principles to the non-exchange transactions, budgets and accountability relationships that characterise public bodies. The chapter on public entities returns to these in detail.

Accrual principle

Transactions are recognised when they occur, not when cash is received or paid, so revenue and the expenses incurred in earning it fall in the same period.

Conservatism principle

Where there is genuine uncertainty, expenses and liabilities are recognised as soon as they are reasonably possible, but income and assets only once they are reasonably assured.

Consistency principle

An accounting policy, once chosen, is applied the same way period after period, so figures stay comparable; a change is only justified by a more reliable presentation, and must be disclosed.

Cost principle

Assets are initially recorded at historical cost, the amount actually paid to acquire them, before any subsequent measurement basis (for example revaluation) is applied.

Economic entity principle

The reporting entity's transactions are accounted for separately from the personal transactions of its owners, even where, as in a sole proprietorship, the two are not legally distinct.

Full disclosure principle

Financial statements disclose everything material to a user's understanding, whether on the face of the statements or in the accompanying notes.

Going concern principle

Financial statements are prepared on the assumption the entity will continue operating for the foreseeable future; where that assumption fails, a different basis of preparation applies entirely.

Matching principle

Expenses are recognised in the same period as the revenue they helped generate, regardless of when cash moves, cost of sales against the sales revenue it produced, for example.

Relevance (fundamental)

Information is relevant if it is capable of making a difference to a user's decisions, either by confirming or changing their prior expectations.

Faithful representation (fundamental)

Information faithfully represents what it purports to represent when it is complete, neutral and free from error.

Comparability (enhancing)

Information is more useful when it can be compared with the same entity's figures from an earlier period, or with another entity's figures for the same period.

Verifiability (enhancing)

Different knowledgeable, independent observers could reach consensus that a depiction is a faithful representation.

Timeliness (enhancing)

Information is available to decision-makers before it loses its capacity to influence their decisions.

Understandability (enhancing)

Information is classified, characterised and presented clearly and concisely, for users with a reasonable knowledge of business and accounting.

Creditors

Suppliers and lenders who have extended credit, checking that the entity can meet its obligations as they fall due.

Investors

Existing and prospective shareholders, assessing whether to buy, hold or sell their stake and what return to expect.

Government

Tax authorities such as KRA assessing tax liability, and other government agencies compiling economic statistics or monitoring compliance.

Trading partners

Customers and suppliers assessing whether the entity is a reliable party to continue dealing with, particularly on a long-term contract.

Regulatory agencies

Bodies such as the Capital Markets Authority or the Central Bank of Kenya, checking compliance with reporting, capital or governance requirements.

International standardisation agencies

Bodies such as the IASB and IPSASB, which issue the standards financial statements are prepared under and monitor how consistently they are applied worldwide.

Journalists (Internal users)

Financial journalists and analysts read published statements to inform the wider public, an external use in itself, but the syllabus groups them at the hinge point before the list turns to users who sit inside the entity and see far more than any published statement.

Owners

Assess how well the business they have invested capital in is being run, and what return that capital is earning.

Directors

Are accountable to owners for the entity's performance, and use the accounts, alongside far more detailed internal reports, to discharge that duty.

Managers

Use accounting information, often at a level of detail no outsider ever sees, to plan, control costs and make day-to-day operating decisions.

Employees

Assess job security and pay prospects, and, where a union is involved, the entity's capacity to meet wage demands.

Incomes

Increases in economic benefit during the period that increase equity, other than contributions from owners, covering both revenue from ordinary activities and gains.

Expenses

Decreases in economic benefit during the period that decrease equity, other than distributions to owners, covering both the costs of ordinary activities and losses.

Assets

Present economic resources controlled by the entity as a result of past events, from which future economic benefit is expected to flow to it.

Liabilities

Present obligations of the entity, arising from past events, whose settlement is expected to require an outflow of resources embodying economic benefit.

Equity

The residual interest in the entity's assets after deducting all its liabilities, that is, Assets minus Liabilities.

Profits etc.

Profit or loss for the period, the residual of income minus expenses, and, where an entity presents it, total comprehensive income, which adds any other comprehensive income recognised directly in equity.

Recognition

An asset is recognised once it meets the definition of an asset and recognising it provides users with relevant information and a faithful representation, in practice, once it is probable a future economic benefit will flow to the entity and its cost or value can be measured reliably.

Measurement

The Conceptual Framework identifies two broad measurement bases: historical cost, the amount paid to acquire the asset, and current value, which includes fair value, value in use and current cost. A standard specifies which basis applies to a given class of asset.

Derecognition

An asset is derecognised, removed from the statement of financial position, when the entity loses control of it, typically on disposal, or when it no longer meets the definition of an asset, for example because it is fully consumed or written off.