FIN1071B In this chapter, we are going to explain the accounting process. In later chapters, we will develop the accounting knowledge: Fund accounting & valuation for International investment funds Assignment, LU, UK

1.1 Introduction

In this chapter, we are going to explain the accounting process. In later chapters, we will develop the accounting knowledge and its application to fund accounting. The key terminology will be explained with practical examples provided to assist your understanding. To record a financial
transaction we first need to understand the concept of accounting.

1.2 The concept of accounting

Accounting is the process of recording financial transactions that an entity has undertaken. The term entity refers to any organization that records financial transactions and includes, manufacturing companies, retailers, banks, fund companies, and not-for-profit organizations.
An entity records its financial transactions so that it can determine the financial performance and financial position of the entity. Each entity must prepare a set of financial statements, usually on an annual basis. A complete set of financial statements includes:
• Statement of Profit or loss (also known as the Income Statement);
• Statement of Financial Position (also known as the Balance Sheet);
• Statement of Cash Flows;
• Statement of Changes in Equity; and
• Notes to the financial statements.
Statement of Profit or Loss: Information contained in this financial statement relates to the income earned and expenses incurred in the reporting period.