Module 2 of 5 in Financial literacy and accounting
How accounting records a business
The accounting ideas behind every statement. Accrual accounting, capital spending and depreciation, working capital, and provisions and impairments.
4 lessons in this module. Progress is saved in your browser as you go.
Financial statements are built from a few accounting rules applied consistently. This module explains the ones that matter most when you read a company's numbers: profit is recorded when it is earned rather than when cash moves, long-lived assets are expensed gradually, money gets tied up in stock and unpaid bills, and expected losses are recorded before they happen.
Each of these rules involves judgement by management, which is why the same business can report different profits depending on the choices made. Knowing where the judgement sits is the first step towards reading statements critically.
By the end of this module you should be able to
- Explain accrual accounting, including revenue recognition, accrued and prepaid expenses, and deferred revenue.
- Distinguish operating expenses from capital expenditure and calculate straight-line depreciation and amortisation.
- Calculate working capital and explain how inventory, receivables and payables tie up or release cash.
- Explain provisions, contingent liabilities and impairments, and why they involve management judgement.
Lessons in order
Module test
10 questions, chosen at random from a bank of 36 questions and balanced across this module's learning goals and difficulty levels. Every question comes with an explanation. You need 80% to pass, and you can retake it as often as you like with a fresh set of questions.
This module builds on
- Profit compared with cash flow: That lesson shows that profit and cash differ; this one explains the accounting rules that cause the difference.
- Assets, liabilities and equity: Prepaid expenses are assets, and accrued expenses and deferred revenue are liabilities.