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Summary Accounting for business (Peter Scott)
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Chapters : 1, 2 , 3 , 4 , 6 , 7
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Chapter 1 : Introduction toaccounting
What is accounting?
Accountin summarises numerical data relating to past events and presents this data as information to
managers and other interested parties as a basis for both decision making and control purposes.
1. Numercial data : Accounting information is mostly in money terms. In a business, it could be the
number of units of product produced rather than just their cost, or the number of units sold in a
given period of time.
2. Relating to past event : accounting systems gather data and then summarise these data to present
details of what has happened.
3. Information presented to managers
4. As a basis for decision making : accounting information is used to determine what went well and
which events did not turn out quite as anticipated.
5. Control purposes : entities set budgets prior to the start of an accounting period which set out what
they aim to achieve in terms of sales, profits and cash flows.
Control, accounting and accountability
Accounting information is thus provided so that individuals and organizations can render an account of
what they have done with the resources placed in their care.
In the same way, company directors present accounts to shareholders and other interested parties on an
annual basis to give an account of how they have looked after the money and other resources entrusted to
them and how they have used that money to invest and generate incorme for shareholders.
Governments publish information on the taxes collected and how those taxes have been spent.
Where power and resources are entrusted to others, it is important that they are accountable for what they
have done with that power and those resources.
Persons entrusted by others with resources are in the position of stewards, looking after those resources
for the benefit of other parties. Providing an account of their stewardship of those resources hekps those
other parties control the actions of their stewards. At the same time, accounts enable these other parties
to make decisions on whether to continue with their current stewards or to replace them with others who
will perform more effectively and provide them with a more efficient and profitable service.
Olivia Hariga IE1SB 1
,The role of accounting information in business decision making
Businesses are run to make profit. Businesses that do not make a profitfail and are closed down. In order to
achieve this profit aim, businesses need to make and implement decisions on a daily basis. Such desicions
compromise :
- What products should we produce?
- What services should we provide?
- How much do our products cost to make?
- …….
These decisions will require accounting input :
1. The marketing department can use reports from sales personnel and consumer evalutions to tell
what the demand for a product is. Accounting staff will tell us what the product costs to make and
what selling price should be.
2. Personnel department can tell us about hiring new staff and the legal obligations. Accounting staff
will tell us what level of productivity the new employees will have to achieve in order to generate
additional profit for the business.
3. The strategy department can tell us what sort of premises we should be looking for, how these
should be designed and what image they should present. Accounting staff will then tell us how
many products we will have to make and sell for the new premises to cover their additional costs
and the best way in which to finance this expansion.
Accounting is thus at the heart of every decision and every activity that a business undertakes.
Olivia Hariga IE1SB 2
,All business desicions require input from different departments and information from one department has
to be integrated with information from other departments before an overall plan of action is put into
operation. Businesses operate as cohesive entitiesn with all departments pulling in the same direction
rather than each following their own individual pathway. Management make desicions and implement
strategies, but underpinning all these desicions and strategies is accounting information.
Accountants have to ensure that the information they provide is as accurate and as up to date as possible
to enable management to make the most effective decisions.
If we did not have accounting information businesses would be lost without the vital information provided
by accounting, there would be no information relating to costs, no indication of what had been achieved in
the past as a point of comparison for what is being achieved now, no figures on which to base taxation
assessments, no proof that results are as companies claim they are.
What qualities should accounting information possess?
The IASB (international accounting standars board) states that financial information should possess :
- Relevance
- Reliability
- Comparability
- Understandability
(read 11,12,14)
Materiality
Desicions should not be overloaded with unnecessary detail. This leads us on to the concept of materiality.
Information is material if its omission or misstatement could influence the economic decisions of users
taken on the basis of the financial statements
Cost vs benefit
Information should only be presented if the benefits of providing this information outweigh the cost of
obtaining it.
The users of accounting information
There are two branches of accounting, one of these branches provides information to external users and
the other provides information to external users.
Accounting branch 1 : financial accounting
Financial accounting is the reporting of past information to users outside the organization. This is then
presented in the annual report and accounts that all companies are obliged to produce by law and publish
on their website.The accounts will also be used as a basis for enabling the business managers or owners
and its lenders and advisors to make desicions based upon them.
The objective of financial statements is to provide information about the financial position, financial
performance and cash flows of an entity that is useful to a wide range of users in making economic
desicions.
Olivia Hariga IE1SB 3
,There are 7 categories of financial statements :
1. Investors and their advisors
2. Employees and their representative groups
3. Lenders
4. Suppliers and other trade payables
5. Customers
6. Governments and their agencies
7. The public
( Read question examples page 16/17)
All user groups will want to know about the availability of cash with which to pay dividends (investors),
salaries (employees), loan interest and loans (lenders), goods supplied on credit (suppliers) and taxes due
(government).
Accounting branch 2 : cost and management accounting
Cost and management accounting is concerned with reporting accounting and cost information to users
within an organization. This is used to help managers manage the business and its activities.
1. Cost and management accountants are first concerned with the cost that go into producing
products and services to determine a selling price for those products and services that will generate
a profit for the business.
2. Management accounting information is then used to plan levels of production and activity in the
future as well as deciding what products to produce and sell to maximise profits for the business.
Management accounting also produces reports to evaluate the results if past plans to see whether
they achieved their aims and the ways in which improvements could be made. Management
accounting is concerned with both the present and the future and how accounting information can
be used for short-term decision making and longer-term planning.
The structure and regulation of the accounting profession
Professional accounting bodies are responsible for admitting individuals to membership and for regulation
and oversight of their conduct as professional people once they have been accepted as members.
Admission to the professional bodies is achieve through a combination of examinations and practical
experience.
Qualified accountants are expected to adhere to certain standards of conduct to maintain the standing of
the profession and to provide a professional service to their clients and the public. They are expected to
behave with integrity, bein honest in their professional and business relationships, be objective, carry out
their duties with due care an competence, maintain confidentiality of information,..
Professional accountants are expected to adhere to and apply the corporate governance codes in
businesses in which they work to ensure the transparency of information presented by these companies.
The limitations of accounting information
There are various aspects of business performance that accounting does not cover :
- It does not provide you with measures of the quality of an organisation’s performance. A business
entity may make profit, but accounting does not tell us the time, effort and thought that went into
delivering the products and services to generate that profit.
- Does not tell you about the pollution and environmental or social damage an entity has caused.
- And it does not provide any valuation or measure of the skills base an knowledge of organizations.
Why is accounting relevant to me?
Information generated by the accounting system is the bedrock on which all business desicions are built.
Olivia Hariga IE1SB 4
, Employees’ performance assessments and rewards will also be based upon accounting measures.
Companies that reward their workers on the basis of what they produce will use accounting information to
determine levels of production and hence levels of pay. Bonuses for production staff will be calculated on
the degree to which they exceed certain levels of production in a given time period.
If you do not understand the basics of accounting you won’t be able to :
- Communicate with others in organization
- Understand accounting reports
- Draw up a financial plan
- Prepare reports
- …..
Chapter 2 : The statement of
financial position
Introduction
All financial statements contain a statement of financial position. This is a summary, in money terms, of the
assets an organisation controls and the liabilities an organization owes to outside parties. We will be
looking at what constitus an asset and a liability and how equity is calculated. We will look at how to
recognize assets and liabilities and how those are classified as current or non-current. Once
assets/liabilities have been used or discharged, they are derecognised. This means they are removed from
the statement of financial position as they are no longer controlled or owed by the entity. Then we move
on to constructing simple statements of financial position. We shall then consider what the statement of
financial position shows us and what it does not show us.
Terminology : statement of financial position/balance sheet
It refers to a summary of statements of assets, liabilities and equity.
Assets
The first part of this statement of financial position shows you the assets that an entity controls.
A resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
An asset represents a store of future economic benefits, the ability to use the assey to generate cash and
profit for a business.
Assets: reliable monetary measurement
An asset can only be recognised in the statement of financial position when the cost of that asset can be
measured reliably in monetary terms.
Olivia Hariga IE1SB 5
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