Chapter 1- Introduction to accounting

What is accounting

process of recording, classifying, summarising and interpreting financial information

book keeping

records financial transactions

what is the purpose of accounting

provide financial information to help stakeholders make informed decisions

what is a business transaction

an event involving money or money’s worth that affects the financial position of a business

who are the internal users of accounting information

business owner/manager, people within the business

who are the external users of accounting information

people or organisations outside the business such as banks, suppliers, government and investors

why does the owner need accounting information

to asses the profitability and financial position of the business, help make decisions

why do managers need accounting information

to help plan, control and make decisions

why do investors need accouting information

to asses whether or not the business is likely to be worthwhile

why do banks need accounting information

to decide whether a business is able to repay loans and interest

why do suppliers need accounting information

to asses whether or not the business is able to pay amounts owed to the supplier

why does the government need accounting information

to calculate taxes and monitor business activity

why might employees be interested in accounting information

to asses the stability and profitability of a business

what is a sole trader

a business owned and controlled by one individual

what is a partnership

a business owned by 2-23 people who share responsibility for the business

what is a non-profit making organisation

a business that aims to provide a service or benefit the community rather than gain profit

what is an asset

anything owned or owed to the business

what is a liability

anything that the business owes to someone else

what is capital

anything invested into the business by the owner

what is a non-current asset

an asset that stays in the business for more than 12 months, is not bought for resale

what is a current asset

short term assets that are either cash or can be converted into cash

what is a non-current liability

amounts the business owes that are due to be paid after/more than 12 months

what is a current liability

amounts that the business owes that are normally due to be paid within 12 months

examples of non-current asset

motor vehicles, premises, fixtures and fittings, machinery

examples of non-current liability

long term loan, mortgage

examples of current asset

cash at hand, bank, trade receivables, inventory

examples of current liability

trade payables, bank overdraft, accrued expenses

what are drawings

assets that are taken out from the business by the business owner for personal use

what is the accounting equation

Asset= capital+liabilities

what is revenue

an income earned from the main activities of a busines

what is an expense

cost incurred by a business in earning revenue

what is a profit

the excess of revenue over expense

what is a loss

the excess of expense over revenue

formula for profit

profit=revenue-expenses

what are goods

items bought for resale

what is inventory

goods held by a business for resale

what is opening inventory

inventory held by a business at the beginning of an accounting period

what is closing inventory

inventory held by a business at the end of an accounting period

what is an accounting period

the period of time at which a business prepares financial statements

what are financial statements

statements prepared from accounting records to show the financial position and financial performance of a business

what is the purpose of a statement of profit or loss

to show the financial performance of a business by calculating a profit or loss for a period

what is the purpose of statement of financial position

to show the assets liabilities and capital of a business at a specific date

7 BOOKS OF PRIME ENTRY (CPPPSSG)

Cash book, petty cash book, purchases journal, purchases returns journal, sales journal, sales returns journal, general journal