Basics of Accounting Flashcards
What is the definition of accounting
The process of collecting, analysing and communicating financial information
What activities do businesses engage in that need to be recorded in books of accounts
- Buying and selling goods
- Paying rent
- Paying salaries
What happens to financial information recorded in the books of accounts at regular intervals
The financial information is summarised and presented in financial statements
Who are financial statements presented to and why
Users of accounting information to assist them in making business decisions
Why do businesses keep accounting records?
- To avoid cash and other assets from being stolen or improperly used
- To monitor the cash available to the business
- To check whether the business is doing well
- To satisfy tax inspectors
- To ensure that everyone gets a fair share of the profits in the case of partnerships
- To satisfy company law requirements in the case of limited companies
- To provide financial reports to shareholders
What is management accounting
Accounting that provides internal reports such as the cost of products and services, and reports looking into the future such as budgets
What is financial accounting
Accounting that provides internal and external reports on financial performance, looks to the past as it records historical transaction.
Why is accounting needed
All financial transactions need to be recorded so that various stakeholders can assess the firms financial performance and financial position
Who are the users of accounting information
- Owners
- Managers
- Lenders
- Suppliers
- Investment Analysts
- Government
- Competitors
- Employees
- Customers
What are the 5 different types of business ownership
- Sole traders
- Limited companies
- Public companies
- Partnerships and limited partnerships
- Charities limited by guarantee
What is the nature of a limited company
- Artificial legal person
- formed by Register of Companies
- owners are shareholders
- Limited liability
- Must produce annual accounts
- Corporation tax
- Private (LTD) or Public (PLC)
What is the nature of a Sole Trader
- A single person owns a business
- Not registered with companies house
- Not a separate legal entity - the owner is liable for all debts
- All profit earned is treated as income and taxed via self-assessment
- Refer to drawings, no dividends
- Owner isnt paid a salary
- No legal requirement to produce financial statements
What are the 5 reasons to keep accounting records
- Prevent cash and other owned items being stolen or misused
- Monitor cash available
- Check if the business is doing well
- Tax requirements
- Keep track of what is owed
What are the 3 reasons to produce financial statements
- Credibility
- Mortgage requirements
- Lending requirements
