CFA: My Takeaways so far

Corporate financial accounting lectures started with the basics, before the troubles of accounting, a good foundation was laid about the mechanics of a business. How an idea transforms into a prototype, and operations is carried out after sourcing funds. Funds can be sourced from boot strapping, loans, incubators, crowd funding, venture capital, etc.; funds are then used to acquire assets which are used for operations that generate revenue. While this is a very brief summary of the business process, it opens your mind to what the accounting could entail. It is important to know that businesses go through the same processes: marketing, procurement, logistics, operations, waste management, quality control, human resources, IT, finance and depending of the size of the business these processes may be carried out by one individual or a separate department.

Accounting is communication; interpreting and providing relevant information to all the stakeholders in the business (owners, customers, banks, government etc.). Relevant information is provided in financial statements, which are: statement of financial position, statement of profit and loss, statement of cash flows, statement of changes in equity, and notes

The process of writing financial statements starts from the transactions, which are gotten from source documents (invoices, database, etc.) from here it is transferred to the Journal, which is a chronological entry of transaction; from the Journal, it is transferred to the books of account (Ledger) and then to the trial balance to check from errors which may occur as a result of omission, wrong postings or arithmetic errors; after adjustments, it is then moved to the financial statements. The major elements of the financial statements are assets, liabilities, equity, revenue, and expenses.

In these past 7 weeks I’ve been introduced to a few accounting concepts:

Matching and Accrual Concepts:

These guide the recognition of revenues and expenses; expenses should be recorded when they are enjoyed (matching concept) not when cash is released, and revenues (transactions in general) should be recorded when they are incurred (accrual concept), regardless of when the actual cash is received or paid. Matching concept focuses on aligning expenses with the revenue they help generate, while the accrual concept emphasizes recognizing transactions when they occur, irrespective of cash movements.

Materiality Concept

Materiality refers to the relative importance or significance of an item or event, in the concept of financial reporting. Materiality concept in accounting states that financial information should be presented in a way that is relevant and significant to the users of the financial statement, i.e. materiality concept helps to maintain a balance between providing useful information and avoiding excessive detail that could obscure the understanding of financial statements.

Objectivity Concept

For an accountant to record anything in his book, he must have evidence! The objectivity concept refers to the principle that financial information should be reliable, verifiable, and free from personal bias. This concept contributes to the overall quality and integrity of financial reporting.

CREDITS AND DEBITS (Double Entry)

I grew up with the idea that debits (bank alerts) meant was subtracted while credits meant money was added. I think I finally grasp this concept of double entry, with the nifty acronym provided in class, DEAL CLIP: Debit expenses, assets and loses (Left side); credit Liabilities, income and provision (right side). Keeping in my that you debit to increase items on the left side, and credit to reduce them and vice versa. For example, if there was an increase in assets, it would be debited left side of the journal; and if there was a decrease in assets, it would be credited on the right side. Conversely, if there was an increase in liabilities, it would be credited on the right side, and if there was a decrease in liabilities it would be debited on the left side.

I picked up several other things from the classes, like the structure of the balance sheet and income statement, auditor’s reports and their qualification etc.