Understanding the purpose of accounting Flashcards
What is the purpose of accounting?
Recording of financial transactions to produce financial information
Recording transactions
Transactions must be kept accurate and up to date in order for the business to be smooth running. All money coming in (sales) and out (expenses) must be recorded. If not the business may get in trouble with the HMRC and tax payments may be wrong.
What does HMRC stand for?
His/Her Majesty Revenue and Customs
Management of the business
Responsible for planning, monitoring, and controlling the business resources. The better the manager, the better decision making and coordination. The manager must ensure there is sufficient funds to pay wages, order new stock and pay bills.
Compliance
Accountant must ensure that businesses comply with the laws and regulations (financial records should provide a fair and accurate picture of the business). Compliance also prevents fraud.
What is fraud?
Fraud is when company monies are used inappropriately and illegally.
Measuring performance
Using financial records to identify if the business is performing well or not
What is gross profit?
The amount of profit left after the cost of producing the good/service is deducted from the sales revenue
What is net profit?
The smaller amount of profit made after all other expenses are deducted from the gross profit
What is value owed to the business?
Amount of money owed to the business from sales that have not been paid for yet
What is value owed by the business?
Amount of money the business owes to others for goods/services purchased but not yet paid for
Control
Accountants control the flow of money into and out of the business by maintaining accurate records and monitoring performance. Ensures the business can meet its day-to-day expenses, such as refilling stock.
Trade receivables
Money that the business is owed
Trade payables
Money that the business owes
