WHAT
IS ACCOUNTING?
You
may have a wide understanding of what accounting and financial reporting is.
Your job may be in one area or type of accounting, but you must understand the
breadth of work which an accountant undertakes. In particular, you need to
understand the distinction between financial accounting and management
accounting.
Definition
Accounting
is the process of recording, analysing and summarising transactions of a
business and communicating that information to decision makers.
Renaissance
scholar Luca Pacioli wrote the first printed explanation of double-entry
bookkeeping in 1494. Double-entry bookkeeping involves entering every
transaction as a debit in one account and a corresponding credit in another
account, and ensuring that they 'balance'. Pacioli's description of the method
was widely influential. The first English book on the subject was written in 1543
by John Gouge. The practice of double-entry bookkeeping has barely changed since then and
is standard across the world, based upon the concept that every transaction has
a dual effect expressed as debits equals credits. The original role of the
accounting function was to record financial information and this is still its
main focus.
FINANCIAL
ACCOUNTING
Definition
Financial
accounting is a method of reporting the results and financial position of a
business. It is not primarily concerned with providing information towards the
more efficient running of the business. Although financial accounts are of
interest to management, their principal function is to satisfy the information
needs of persons not involved in running the business, in particular shareholders.
Financial accounts provide historical information.
MANAGEMENT
ACCOUNTING
The
information needs of management go far beyond those of other account users.
Managers have the responsibility of planning and controlling the resources of
the business and for making decisions about the direction of the business both
in the longer term and on a day to day basis.
Therefore
they need much more detailed information. They also need to plan for the future
e.g. budgets, which predict future revenue and expenditure.
Definition
Management
accounting, sometimes known as cost accounting, is a management information system
which analyses data to provide information as a basis for managerial action.
The concern of a management accountant is to present accounting information in
the form most helpful to management.
WHAT
IS A BUSINESS?
Definitions
Businesses
of whatever size or nature exist to make a profit. A business is an integrated
set of activities and assets that is capable of being conducted and managed for
the purpose of providing a return in the form of dividends, lower costs or
other economic benefits directly to investors or other owners, members or
participants. There are a number of different ways of looking at a business.
Some ideas are listed below.
· A business is a commercial or
industrial concern which exists to deal
in the manufacture, re-sale or supply of goods and services.
· A business is an organisation that
uses economic resources to create goods or services which customers will buy.
· A business is an organisation
providing jobs for people.
· A business invests money in
resources e.g. buildings, machinery, employees, in order to make even more
money for its owners.
This
last definition introduces the important idea of profit. Businesses vary from
very small businesses e.g. the local shopkeeper or plumber, to very large ones
e.g. IKEA, Nestlé, Unilever. However all of them want to earn profits.
Definition
Profit
is the excess of revenue (income) over expenses. When expenses exceed revenue,
the business is running at a loss. One of the jobs of an accountant is to
measure revenue and expenditure, and so profit.
TYPES
OF BUSINESS ENTITY
There
are three main types of business entity:
· sole traders;
· partnerships; and
· limited liability companies.
Sole
traders are people who work for themselves. Examples may include the local
shopkeeper, a plumber and a hairdresser. The term sole trader refers to the ownership
of the business – sole traders can have employees.
MODULE
1
Partnerships
occur when two or more people decide to run a business together. Examples may include
an accountancy practice, a medical practice and a legal practice. Limited
liability companies are incorporated to take advantage of 'limited liability'
for their owners (shareholders). This
means that, unlike sole traders and partners, who are personally responsible for
the amounts owed by their business, the shareholders of a limited liability
company are only responsible for the amount unpaid on their shares. This means
that if the shareholders have purchased shares costing $100 but have only paid
$40 to date, they would have to contribute the remaining $60 towards paying the
company's debts.
Generally,
in law sole traders and partnerships are not separate entities from their
owners. This is true in many jurisdictions, for example Australia, the UK,
India, New Zealand, China, Japan and Germany. In the US, however, partnerships
do have separate legal personality but the partners are wholly liable for debts
of the partnership. In all cases, however, a limited liability company is
legally a separate entity from its
owners and it can issue contracts in the company's name.
For
accounting purposes, all three entities are treated as separate from
their owners. This is called the business entity concept. The methods of
accounting used in all three types of business entity will be very similar,
although will tend to become more complex the larger the entity.
NON-COMMERCIAL
UNDERTAKINGS
It
is not only businesses that need to prepare financial statements. Charities and
clubs, for example, may need to prepare financial statements every year.
Financial statements also need to be prepared forgovernment organisations
(public sector organisations such as hospitals and local councils).
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