Purpose of Accounting Flashcards
explain how accounting can be used to record transactions
It is very important that business owners make a habit of recording their business transactions every day. It will assist in making informed, efficient and precise decisions
at any time.
If the business does not record income and outgoings then it can have serious impacts such as the business paying incorrect taxes to HM Revenue and Customs.
explain how accounting can be used to manage a business
When following accounting procedure well and recording transactions accurately it can provide a business with vital information that can help manage the business in terms of
planning for the future, monitoring current performance and making changes to control the performance of the business.
The purpose for a manager of understanding the accounts of the business allows them to make informed decisions about
the direction of the company.
It can allow them to plan for staffing levels, monitor levels of stock and control costs such as wages and budgets.
explain how accounting can be used to measure performance
Without accounting it would be impossible to know whether the business is making a profit or a loss. There are key indicators of financial performance such as;
Sales revenue (number of sales x selling price)
Gross profit (Profit left after Cost of goods sold is taken from revenue)
Net profit (Gross profit minus expenses)
explain how accounting can be used to prevent fraud (compliance)
compliance simply means making sure that a company’s financial matters are being handled in accordance with laws and regulations.
At any point in time, a corporation should be able to provide accurate information about its accounts to its shareholders or
to regulating authorities.
To ensure compliance, it’s necessary to have processes in place for recording, verifying, and reporting the value of a
company’s assets, liabilities, debts, and expenses.
Being compliant means that you prevent fraud (the inappropriate use of company funds) of as much as physically
possible and also that you are meeting the laws and regulations set.
explain how accounting can be used to control a business
accounting allows the business to take control of its finances as it knows the income and outgoings therefore helping prevent fraud as transactions will lag as being uncharacteristic or unusual and therefore will be
investigated.
key form of control is that it enables the business to
have a clear picture of its trade receivables (money owed to
the business) and its trade payables (money the business
owes). Being able to control these two things means that the
business will ensure its survival as it will not owe too much
money and it can also manage the payments it is owed to
establish good credit control.
