Chapter 1: Introduction to Accounting

A Brief Look at the Historical Development of Accounting

Accountancy is said to be the oldest profession in the world, whose earliest form was developed alongside the use of money

However, its modern day roots stem from the 12th century, with Pacioli's book, published in 1494

Three main accounting statements

The statement of Financial Position (Balance Sheet)

Income Statement

Cash Flow Statement

Why does a business exist?

To provide products/services to survive the need of the public

To provide a means of livelihood by its employees or workers

Not all businesses exist to make a profit

Charities

Businesses which are created for a single purpose

Types of entity

Business Types

Manufacturing (product)

Service

Ownership

Unlimited Liability

Business owners can lose their personal possessions if the business fails

Sole Traders

Owned by one person

Account for personal finance and business finance seperately

Partnership

Owned by 2 or more people

Account for personal finance and business finance seperately

Governed by the Partnership Act 1890

Limited Liability

Business owners cannot lose their personal possessions if the business fails

Private Limited Companies & Public Limited Companies

Business is a separate Legal entity to the business owners

Strict rules over accounting and reporting

Governed by the Companies Act of 2006

Business-related Terms

Enterprise

Most general term used to refer to any type of organizations including non-profit making enterprises

Business

An organization which sells a product/service with the objective of making a profit

Company

An enterprise constituted in a particular legal form, usually limited liability

Firm

An incorporated business / unlimited liability

The role of the Accountant

The accountant provides a service to the business by converting the different areas of the business into the common denominator of money

The accountant ensures that the activities of the business are recorded properly, accurately and consistently

Using the gathered information, accountant prepare statements which provide the results of the activities of the business

What is Accounting?

Gather financial information to present for effective decision-making

Statement of Financial Position: the values of the company's possessions and assets

Cash Flow Statement: monitor the cash flows of the company

Income Statement: match sales against costs to establish a profit

Accountants may wish to know

Debts owed

Accounts owing

Performance

The work of the Accountant

Preparation of report for decision-making

Assisting in the interpretation of the accounts

Recording of the financial data relating to the business

Providing answers to problems given to them by management

Users of Accounting Information

Professional Accounting Bodies

Important Terms

Areas of Accounting

Management Financial

*Financial Accounting

Using a standard format

External users

Summary

Historic Content

Can use estimates

Any Format

Highly Detailed

Internal Users

Historic & Future Content

Daily/Weekly/Annually

Accurate

Once a year

External Users

Internal Users

Lenders / Banks

Customers / Debtors

Government & Agencies

Suppliers / Creditors

Investors

The General Public

Management

Employees

Independent Accounting Practicioners

Accountants in Business

Accounts Payable/Creditors

Liabilities

Non-current Liabilities

Current Liabilities

Assets

Non-current Assets

Current Assets

Profit

Net Profit

Gross Profit

Inventory

Opening Inventory

Closing Inventory

Cost of Sales

Sales

Include all Sales made for the main purpose of the business within the reporting period

The cost of all the goods that have been sold

Purchase Cost

Production Cost

The value of the stock within the company and the start of the reporting period

The value of the stock within the company and the end of the reporting period

Gross profits + Any other Business Income - General Business Expenses

Sales - Cost of Sales, the profit made before deduction of any overheads or general business expenses

Represented By

Accounts Receivable/Debtors