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Unit 5 P1 – Describe the purpose of accounting for an organisation
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Unit 5 P1 – Describe the purpose of accounting for an organisation
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Unit 5 – Business accountingPass criteria 1
P1 – Describe the purpose of accounting for an organisation
Accounting is the process of recording financial transactions that happen within a business.i
The process of accounting produces financial documents that can be used within the
business and by people outside of the business.
Record transactions
Recording transactions is a necessity for a business like Tesco as it means that they can keep
track of money that is coming into the company and money that is going out. Doing this
ensures that Tesco doesn’t spend money that it doesn’t have, if properly managed it
ensures that the business doesn’t have issues with HM Revenue and Customs (HMRC) who
are responsible for collecting tax.
Monitor activity
Tesco will use the financial documents that are produced as an indication into how well the
business on a daily, weekly, monthly and yearly basis. Tesco will be able to see the trends of
how well they are doing a potentially put in a plan if the profit is on a downward trend.
Tesco will also be able to use the financial documents to see whether they have enough
money for the foreseeable future.
To control the business
Tesco could look at the business’s accounts and see that income is increasing, yet the profits
are staying the same. Tesco would then know that their operational costs are also going up
and look into whether they can reduce the costs whilst keeping the income on a similar
level.
Management of the business
Having someone who fully understands the accounts of Tesco would be very beneficial for
the business because they will have an understanding of what the business can do and not
do to keep the accounts the same or make them better. Staff’s wages would need to be
managed to ensure that Tesco has enough money in the accounts to pay the staff, if they do
not manage it well enough then they can end up in tribunals with their staff and end up
paying the staff their wages that are owed and courts fees.
Measurement of financial performance
All businesses need to know how well they are doing and accounting does this for them.
Tesco needs to know how well they are doing because it tells them whether they are
making a profit or loss and whether they are going to end up in debt. If they did end up in
debt then they would need to pay it back and if Tesco does not have the financial resources
to do so then they could end up in trouble.
i http://www.accountingcoach.com/blog/what-is-accounting
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