Purpose of Accounting Flashcards
What is accounting?
Accounting involves the recording of financial transactions, planned or actual and the use of these figures to produce financial information.
Accounting importance - Record transactions
Keeping business records accurate and up to date is important for the running of a business. The owner or bookkeeper must record all the money coming into the business and all the money coming out. Failure to do this may find the business not chasing payments, forgetting to pay bills or more seriously in trouble with HMRC
Accounting importance - Management of the business
A manager who clearly understands the businesses accounts will be better able to make informed decisions and plan for the future. Management of a business involves careful coordination of resources including staff, materials, stock and money. The manager must ensure there are sufficient funds to pay wages, order new stock, pay bills and meet other demand for cash outflows.
Accounting importance - Compliance
Financial reporting is governed by law and regulations. This is to ensure that any financial records give a fair and accurate picture of the business. They must comply with laws and regulations to ensure that investors and stakeholders are not misinformed. Compliance will help protect against fraud.
Accounting importance - Measuring performance
Without financial records it would be impossible to know if the business was making a profit or loss or whether the business was owed money or was in debt.
Measuring performance continued - key indicators of financial performance
- gross profit - amount left after cos of producing the good or service is deducted from the amount of sales revenue.
- net profit - smaller profit made after all expenses are deducted from the gross profit
- value owed to the business - amount of money owed to business from sales that have not been paid for.
- value owed by the business - amount of money the business owes to others for goods or services purchased but not yet paid for.
Accounting importance - Control
Accounting will control the flow of money into and out of the business by maintaining accurate records and monitoring performance. It will also track the amount of money the business is owed, trade receivables, from sales of goods and the amount the business owes, trade payables. This also involves credit control which aims to ensure that all money owed to the business is paid on time
