Introduction to Accounting

YouTube videoLoad YouTube video

1 Introduction

In this chapter we will look at what accounting is and why accounting information is prepared. We will also consider the different types of business entity that you can be asked to deal with and also the different users of financial statements.

2 Definition of accounting

Accounting comprises the recording of transactions, and the summarising of information.

Recording

Summarising

• Statement of Financial Position (Balance Sheet)

• Statement of Profit or Loss

3 Types of business entity

There are two types of business entity that you can be asked to deal with in the examination:

Sole trader

Limited liability company

Additionally, you should be aware of the following, although you cannot be asked any accounting entries:

Partnerships

In all cases, we apply the separate entity concept – that is that the business is regarded as being separate from the owner (or owners) and that accounts are prepared for the business itself.

4 Users of accounting information

Users of the financial information for a business will include the following:

• management

• owners / shareholders

• potential investors

• lenders

• employees

• the government

• the public

The main financial statements that are likely to be available to all users are the Statement of Financial Position and the Statement of Profit or Loss. Other statements may be required to be produced (or may be produced even if not required), such as a Statement of Cash Flows. We will consider these later.

5 Comparison of Financial accounting with Management accounting