Unit 3: Aim C Understanding the purpose of Accounting Flashcards
What Accounting
Accounting is the process of recording, classifying, and summarizing financial transactions to provide useful information for decision-making. It helps businesses, organizations, and individuals track their financial performance, manage budgets, and comply with legal requirements.
What are the Five Purpose of Accounting
- Recording transactions
- Management of the business
- Compliance
- Measuring performances
- Control
What are Recording Transactions?
Advantages and Disadvantages
Recording transactions allows the business to keep records accurately and up to date which is important for the smooth running of the business so the book-keeper ensures and keeps a record of all the money coming in and out of the business. If the business fails to do this than they may find themselves chasing payments and therefore forgetting pay bills the pending bills and this will lead the HM Revenue & Customs (HMCR) taking a legal action.
Advantages:
- Financial Clarity: Accurate records provide a clear picture of the business’s financial health, helping identify trends and areas for improvement.
- Compliance: Maintaining proper records ensures compliance with tax laws and regulations, reducing the risk of penalties.
Disadvantages:
- Time-Consuming: Keeping detailed records can require significant time and effort, especially for small businesses.
- Cost: Hiring skilled personnel or investing in accounting software can be expensive, impacting overall profitability.
What are Management of Business?
Advantages and Disadvantages
This is where the manager is responsible for coordinating and monitoring the resources of the business plus the manager ensures that they clearly understand the business accounts better to make informed decisions to further prosperous business
Advantages:
- Informed Decision-Making: A clear grasp of financial data allows managers to make strategic choices that can improve efficiency and profitability.
- Resource Optimisation: Effective management of resources helps to minimize waste and ensure that funds are allocated where they are most needed.
Disadvantages:
- Complexity: Managing financial resources can be complicated, requiring expertise and attention to detail.
- Pressure: The responsibility of balancing various financial obligations can create significant stress for managers, particularly in challenging economic conditions.
What are Compliance?
Advantages and Disadvantages
Its a financial recording governed by laws and regulation to ensure that any financial records are given a fair and accurate picture of the business which is important as it allows the business to comply with these rules and regulation to ensure that investors and other stakeholders and not misinformed furthermore it will also help prevent fraud.
Advantages:
- Accuracy and Transparency: Ensures financial records are reliable, giving a true picture of the business’s performance.
- Fraud Prevention: Helps detect and deter fraudulent activities, protecting company assets and interests.
- Stakeholder Trust: Builds confidence among investors and stakeholders, encouraging investment and engagement.
Disadvantages:
- Compliance Costs: Adhering to regulations can be expensive, particularly for small businesses, due to costs related to audits and reporting.
- Complexity: Navigating regulatory requirements can be complicated and time-consuming, diverting resources from core business activities.
What are Measuring performances?
Advantages and Disadvantages
Without the financial records it would rather be impossible to know if a business is making a profit or loss or to see if the business owe the money to anyone (to see if the business is going to fall in debt)
The business uses these key terms : gross and net-profit, value owed to the business and value owed by the business
Advantages of Financial Records
- Informed Decision-Making: Accurate records help businesses assess profits and debts, enabling strategic decisions to improve financial performance.
- Performance Measurement: Tracking key indicators like gross and net profit allows businesses to evaluate financial health and set realistic goals.
- Disadvantages of Financial Records
Resource Intensive: Maintaining records can be time-consuming and costly, straining resources for small businesses. - Complexity: Managing financial data can be complicated, leading to potential errors and misleading information if not handled properly.
What is Control?
Advantages and Disadvantages
Controlling the flow of money coming into the business by maintaining accurate records and monitoring performances which means any unusual activity is spotted helping to prevent fraud and tracks the amount of money the business owed trade receivables and the sales of goods and the amount the business owes to its suppliers, trade payables.
Advantages of Control in Accounting
- Fraud Prevention: By maintaining accurate records and monitoring financial activities, businesses can quickly identify unusual transactions, reducing the risk of fraud.
- Financial Stability: Tracking trade receivables and trade payables helps ensure that the business has enough cash flow to meet day-to-day expenses, promoting overall financial health.
Disadvantages of Control in Accounting
- Resource Intensive: Maintaining detailed records and monitoring performance can be time-consuming and may require dedicated staff or accounting software, increasing operational costs.
- Complexity: Managing trade receivables, trade payables, and credit control can be complicated, especially for larger businesses, leading to potential errors if not handled carefully.
What are the two types of income?
Capital and Revenue Income
What is Capital Income?
The money invested by the owners or other investors that is used to set up a business, tends to bed used to buy things that will stay in the business for a medium to long time so this is known as fixed asserts.
What is Revenue Income?
Revenue income is the money that comes into the business from performing its day-to-day function –
selling goods or providing a service. The nature of the revenue income depends on the activities that the business does to bring in money.
What are the 5 types of Capital Income
- Loans
- Mortgages
- Shares
- Owner’s Capital
- Debentures- must be payed in an agreed period of time
What are the five types of Revenue Income
- Sales
- Rent Received
- Commission Received
- Interest Received
- Discount Received
What are the types of Expenditure
Capital and Revenue Expenditure
What is Expenditure
Expenditure is money spent by a business and can be split into two categories: capital expenditure and revenue expenditure. You are going to start by looking at capital expenditure. This is used to buy capital items, which are assets that will stay in the business for a long period of time. Capital items are non-current assets and intangible assets, as explained below.
What are non current asserts
Non-current assets are items owned by a business that will remain in the business for a reasonable period of time. These are shown on a business’s statement of financial position so in a balanced sheet
