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