Financial and Management Accounting Foundations
Start here if you can work with percentages but have not studied accounting. These notes connect a few recurring ideas: when an event belongs in the accounts, how balances change, why profit differs from cash, and which figures help answer a decision question. Each idea leads to a worked example and to topic pages where you can explore it further.
Read the summaries first for an overview, then follow a calculation when you want to see how the reasoning works. A calculator and paper, or a spreadsheet, are sufficient. Python cells provide an optional way to vary the assumptions; the explanations and worked tables can be read on their own.
The ideas to connect
| Central idea | What it helps explain |
|---|---|
| An event can affect more than one account and more than one period | Why entries balance, yet may still need adjustment |
| A balance records a position; a flow describes change over a period | How records connect profit, capital and financial position |
| Recognition and payment can occur at different times | Why a profitable business can still need cash financing |
| A comparison needs a defined purpose and a suitable benchmark | Why ratios, contribution, variances and NPV answer different questions |
Entry diagnostic
Try answering in your own words, then compare your reasoning with the feedback.
- A shop receives £900 for a service to be delivered next month. What increases now?
- It collects £700 owed for last month's completed sale. Is that new revenue?
- It buys equipment for £6,000 cash. Does the whole payment become this month's expense?
- Which information would an unpaid supplier and the shop's owner each request?
Feedback
- Cash and an obligation to provide the service both increase; delivery has not yet earned revenue.
- Cash increases and the receivable decreases. The collection does not create another sale.
- Equipment initially replaces cash as an asset. Depreciation allocates its depreciable cost over use; it is not another cash payment.
- The supplier needs payment timing and liquidity evidence. The owner also needs profitability and prospects. Neither question can be answered from the bank balance alone.
If receipts and revenue, or payments and expenses, are still difficult to distinguish, begin with the records and adjustment notes below. If the distinction is familiar, use the examples to find the questions you want to explore next.
A map of the core topics
The order follows the relationships between concepts. You can read it from top to bottom or return to an individual topic when a later example exposes a gap.
| Topic and summary | Read and work through | Question to carry forward |
|---|---|---|
| Records: describe the event before choosing the accounts | Reporting foundations; double-entry | Can equal debits and credits record the wrong event? |
| Adjustments: distinguish an amount already recorded from the balance required | Accounting cycle; worked records example | Why can an adjustment change profit without changing cash? |
| Statements: different views draw on the same records | Profit and capital example; linked statements | Why does profit enter equity, while drawings are not an expense? |
| Analysis: interpret both the measure and its composition | Cash and control; ratios | Can an unchanged current ratio conceal a change in liquidity? |
| Costs: contribution covers fixed costs before it becomes profit | Cost concepts; CVP | Which assumptions must hold for a break-even calculation to be useful? |
| Budgets: separate timing, activity and cost performance | Cash-budget example; budgets and variances | Does a larger cost total reflect more output or a cost variance at the same output? |
| Investment: compare future incremental cash flows at a common date | Capital budgeting; decision examples | How can a forecast or timing change reverse a ranking? |
How to use a worked example
Read the business facts, then identify what the calculation is meant to explain. Follow the workings with that question in mind: which amount is a balance, which is a movement, and which is an assumption? This makes the method easier to reconstruct when the numbers change.
When revising, cover the answer and explain the next step before calculating it. If your result differs, locate the cause in the classification, timing or arithmetic. A short note explaining the error is more useful than copying the corrected total alone.
The three foundation examples have different purposes: records to statements traces one set of accounts, cash budgeting follows payment dates, and decision comparisons shows why the choice of measure matters. Their fictional datasets are independent.
Connections worth exploring
Three connections take the notes beyond isolated calculations:
- Accruals and cash: recognising a credit sale does not collect it. Trace the receivable into the cash budget, then consider what a ratio can and cannot reveal about collection timing.
- Activity and performance: more output can increase total variable cost even at unchanged unit cost. The flexible budget removes that activity difference from the comparison before you investigate the remaining variance.
- Liquidity and value: a project may have positive NPV while requiring cash before it generates receipts. Appraisal and funding address connected questions, but one calculation does not answer both.
For each connection, change one assumption in a worked example and explain which result changes and which remains intact. The topic links above provide the fuller derivations and limitations.
Continue into the full course
To explore recognition and measurement in more depth, continue with revenue, inventory and long-lived assets. For internal decisions, read short-term choices and investment. The main course maps the remaining topics, and the Northstar capstone brings them together. Keep the Harbour examples separate from Northstar's account balances.