Some Key Concepts I Have Learned In Corporate Financial Accounting (Part Two)

In my last article, I explained some key concepts I had learned in my Corporate Financial Accounting class at LBS. In this piece, I’ll be sharing some more useful terms I’ve come across. 

• Accounting structure: This typically refers to the organization and arrangement of various elements within the accounting system. It shows how financial information is classified, recorded, and reported. It involves the set-up and design of the accounting system to ensure accuracy, consistency, and meaningful presentation of financial data. This structure includes the chart of accounts and may include different accounts, sub-accounts, and the relationships between them, forming a framework that facilitates efficient financial management and reporting. The accounting structure comprises four key elements:
  • Processes: Flow of business from initiation to execution
  • People: Customers, regulators, etc
  • Software: Enterprise Resource Planning (ERP), Accounting software, Excel
  • Tax & Compliance: Dates, e.g Year end, Withholding tax, VAT returns

• Matching concept: This states that expenses should be recognized and recorded in the same period that we record the revenues the expenses helped generate. This concept is crucial for accurately portraying the financial performance of a business over a specific period. By matching expenses with the related revenues, it helps in determining the net income for a given accounting period.

• Amortization: Amortization refers to expensing the acquisition cost minus the residual value of intangible assets systematically over their estimated useful economic life to reflect their consumption. It’s essentially depreciation but for Intangible assets.

• Owns and controls: This is associated with the concept of control over an entity. This concept is particularly important in the context of consolidating financial statements for a group of companies.

• Impairment: This implies that the value at which you buy an asset today is not the value it will be in the future. Impairment occurs as a result of a reduction in the value of the asset carried in your books.

• Held to maturity: This means an asset (usually a financial instrument) must be owned until its maturity date. This term is typically used for non-current assets but it can sometimes be used to refer to current assets.

• Available for sale: This means an asset (usually a financial instrument) can be sold before its maturity date. It is usually used to refer to non-current assets.

• Right-of-use assets: These are assets that have been leased to the company to use over a given period. They cannot be classified as PPE as they are not owned by the company.

• Right-of-return assets: These are assets that a company recognizes when it sells goods to a customer with an agreement that allows the customer to return the goods for a refund or exchange.

• Cash and cash equivalents: Cash equivalents are also known as near-cash items. E.g treasury bills, short-term bonds and securities.

• Book value vs market value: Book value is the value of an item in the books/balance sheet (the original value) while the market value is the value it would fetch in the market, which indicates market perception of the item’s value.

That is all for today!