What Is Accounting? Flashcards
Accounting can be defined as the means by which a business maintains a record of all the financial activities of the firm
What can happen to firm’s money
It either comes or it goes out
From what sources money comes
- Owner
- Third parties - customers, banks, lenders
- Income from sales
- Other income - rent, interest, investments
Money can be spent on what?
- Assets - items to run business - machinery, premises, stock, vehicle
- Expenses - the costs of running the business - wages, advertising, business rates etc
Reason to keep accounts?
To record where money has come from and where it has gone to
By keeping a/c firm have records of?
- What it owns
- How much it owns to 3rd Parties - suppliers, banks
- How much it is owed by 3rd parties - customers
- The cost or expenses incurred in running the business
- Its income from sales and other sources
Profit?
Is an increase in the net worth of the business in a given period of time
What is a sucessful business?
Will be one which
FORECAST - PLANS - MONITORS - CONTROLS
What is forecasting?
- What growth in sales can be achieved given past performance
- What will cost to run a business next year
- Can firm afford any further investment
What is planning?
A plan is a roadmap linking where the business is now to where it wants to be in the future
What is monotoring?
It is necessary periodically monitor the actual performance against the budget and identify areas which are different from the plan
What is Controlling?
It is essential that corrective actions is taken in those areas where performance is different from the plan
Interested parties who might use the accounts includes?
- Owners - protection of mismanagment and fraud
- Investors- to make sure that money safe and also can produce a return in a form of profit
- Lenders- have to make sure firm has an ability and resources to repay a loan
- Suppliers- sold on credit so make sure they will be paid
- Customers- to receive goods and services they paid for
- Employees and trade unions- job security
- Gov and other agencies - have access to the financial statement to determime if correct amount of tax is paid
- Insurance companies- will review sales revenue and assets owned to assess business insurance premium
- The public- if business is environmently friendly and impact to local issues
End of year financial statements produces by the financial accounting process
- Profit and loss statement (income statement) - determines whetever the business has made a profit or loss in the year
- Balance sheet (statement of financial position) - shows what the business owns and owes on a given date
- Cash flow statement - shows where money has come from and gone to during the year
Internal a/c produced by the ‘management accounting’ process?
- Monthly management accounts - profit and loss statement and financial position balance sheet
- Monthly cash flow statement - projected cash flow expectation and actual receipts and payments of cash
- Monthly budget figure - forecast income and expenditure against which the actual performance
End of year financial statements are prepared from?
Info collected in the book- keeping system
