Intro to accounting

• Accounting


  The process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information

  
• Accounting influences behaviour
• Accounting

  • The 'language' of business
  • Collecting, analysing and communicating financial information for the purpose of making informed decisions
  • An information system
• Questions answered by accounting

  • How are we doing, and are we doing well or badly? (Score keeping)
  • Which problems should be looked at? (Attention directing)
  • Which is the best alternative for doing a job? (Problem solving)
• Sector examples

  • Manufacturing
  • Trading
  • Service
• Types of business examples

  • Sole trader
  • Partnership
  • Company
• Sole trader


  • An individual may enter into business alone, either selling goods or providing a service
  • If cash is not available, the sole trader may borrow from a bank to start the business
  • Sole trader's business may be very much intertwined with the personal life
  • For accounting purposes, the business is regarded as a separate economic entity, of which the sole trader is the owner who takes the risk of the bad times and the benefit of the good times
• Sole trader accounting information needs

  • Government (HM Revenue and Customs) for tax collecting purposes
  • The bank for the purposes of lending money to the business
  • A person intending to buy the business when the existing owner retires
• Partnership

  • Formed by agreement but not necessarily in writing
  • Sole trader may expand to enter into partnership with one or more people
  • Permits a pooling of skills or may allow one person with ideas to work with another who has the money to provide the resources needed to turn the ideas into a profit
  • All partners are entitled to share in the running of the business
• Partnership risks

  • There are real financial risks if the business is unsuccessful
  • One partner may be required to meet all the obligations of the partnership if the other partner(s) does not have sufficient personal property, possessions and cash. This is described in law as joint and several liability
• Partnership accounting information needs


  • Partners wishing to be sure that they are receiving a fair share of the partnership profits
  • HM Revenue and Customs
  • Banks who provide finance
  • Other persons who may be invited to join the partnership
• Partnerships are not obliged to make accounting information available to the public
• The major risk attached to either a sole trader or a partnership is that of losing their personal property and possessions including the family home, if the business fails
• Limited liability company

  • Companies are registered under the Companies Act. Memorandum and articles of association set out the powers allowed to the company
  • Shareholders (owners) appoint directors to run the business
  • The personal liability of the shareholders is limited to the amount they have agreed to pay for shares
  • Companies must make accounting information available to the public through the Registrar of Companies Annual Financial Statement ("The Accounts")
• Private limited company

  • Has the word 'Limited' (abbreviated as 'Ltd') in its title
  • Prohibited by law from offering its shares to the public (appropriate to a family-controlled business)
• Public limited company

  • Has the abbreviation 'plc' in its title
  • Permitted to offer its shares to the public. In return, it has to satisfy more onerous regulations
• Financial statements

  • Income statement
  • Statement of cash flows
  • Statement of financial position

  
• The 3Ps

  • Provision of Finance (Equity and Liability)
  • Operating Assets
  • Profit (Revenue - Expenses) and Cash flow (Cash in - cash out)
• Users of financial information

  • Business
  • Competitors
  • Lenders
  • Managers
  • Suppliers
  • Investment analysts
  • Community representatives
  • Government
  • Employees and their representatives
  • Customers
  • Owners
• Fundamental qualitative characteristics of accounting information

  • Relevance
  • Faithful representation
  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
• Financial accounting

  Helps answer the question: Is it worth it? How well are we doing? How might we do better?
• Management accounting

  Helps answer the question: How might we do better with respect to our revenue and expense decisions?
• Business finance/ financial management

  Helps answer the question: How might we do better with respect to our financing (equity and liability) and asset investment decisions?
• Differences between management and financial accounting

  • Who are the users?
  • Are they published?
  • Forward looking or historic?
  • How often created?
  • Area of focus?
  • Do rules and regulations apply?