Introduction to accounting Flashcards
What is accounting?
Accounting is a way of recording, analysing and summarising the transactions of an entity (a term we shall use to describe any business organisation)
Three types of profit-making business entity
Sole traders, partnerships and limited liability companies
What is the objective of general purpose financial reporting?
To provide financial information about the reporting entity that is useful to potential investors, lenders and other creditors in making decisions about providing resources to the entity
Who needs financial information?
Investors, employees, lenders, suppliers, customers, governments and their agencies, and the public
What information would investors be interested in?
Profitability and return, will I get paid dividends? How risky is the investment?
What information would employees be interested in?
What’s the salary? Will they be able to pay me? Will the business continue (going concern)? Job security? Pension? Bonus?
What information would lenders (banks) be interested in?
Can the business repay? Can they pay interest? Can they pay capital? Credit rating? How many other loans do they have?
What information would suppliers be interested in?
Trade payables? How much cash do they have (can they repay what they owe)? Payables days?
What information would customers be interested in?
What are the quality of the goods like? Is it an ethical company? How much profit are they making? Pricing? Do they pay taxes?
What information would governments and their agencies be interested in?
How much tax does the entity pay? ESG? Compliance with laws and regulations? Foreign trade? How much are they contributing to the economy in general?
What information would the public be interested in?
ESG, ethics, shares, profit, community/economy impact
Other name for SOFP
Balance sheet
Statement of financial position
A list of all the assets controlled and all the liabilities owed by a business at a particular date: it is a snapshot of the financial position of the business at a particular moment. It also quantifies the amount of the shareholders’ interest in the company: equity
What is equity?
The amount invested in a business by the owners. For a sole trader this is also known as capital
