Lecture 1-2 (What is accounting and who needs it?) Flashcards
What is accounting?
The process of identifying, measuring and communication economic information to permit informed judgements and decisions by the users of that information.
ACCOUNTING ENTITIES
The discrete individual units of society upon which accounting focuses and with whose events accounting is concerned.
ECONOMIC EVENTS
The type of events with which accounting is concerned.
FINANCIAL DESCRIPTION
The way in which economic events are described.
USERS OF ACCOUNTS
The people for whom this information is prepared.
PUBLIC ORGANISATION
Ultimately under government control
PRIVATE ORGANISATION
Owned and run by individuals, groups, companies, etc.
COMMERCIAL ORGANISATION
Commercial objectives (e.g. make profits, expand market share).
NON-COMMERCIAL ORGANISATION
Not profit oriented, still have specific objectives.
Types of commercial organisations (private/public).
Sole trader (Private)
Partnership (Private)
Company (Private)
Nationalised industry (Public)
LTD
Limited- private company so shares not publicly traded.
plc
public limited company- shares traded on stock exchange.
Types of non-commercial organisation.
Local government (Public) Charities (Private) National Government (Public)
SOLE TRADER
One person in the business.
No formal set up- owner simply introduces some money to start the business (proprietors capital).
Separate accounting entity, but NOT a separate legal entity.
Unlimited liability
Personal Tax
No need to publish accounts
PARTNERSHIP
No formal set up- partnership agreement advisable.
Partnership act 1890 applies
Maximum 20 partners
Not a separate legal entity but a separate accounting entity.
Joint and several liability.
Copies of accounts not made available to the public.
Can carry out any legal business activities agreed on by the partners.
Audit not compulsory.
COMPANY
Formal legal set up.
Separate legal entity.
Limited liability.
Subject to Companies Act.
No limit on number of shareholders.
Management undertaken by directors.
Accounts publicly available.
Activities restricted to those in memo and articles of association.
In public companies shares freely transferable.
Except for very small companies and audit is required.
What financial information do managers have access to?
As they are internal to the organisation they will have free access to all information.
What financial information do external stakeholders have access to?
May only have access to the financial statements.
Examples of stakeholders.
Investors- buy/hold/sell shares.
Lenders- lending decisions and terms, monitor loan decisions.
Other creditors- lending decisions and terms.
Suppliers
Employees- job security; salary claims.
Customers- whether to buy; continuity of supply.
Government- tax; environmental; employment; industry policy; statistics.
Public- Assess economic, social and environmental impact.
