accounting semester one theory

types of businesses

retail (sells goods that are already made)

service (provide service)

manufacturing (make a product)

role of the accountant

• accounting is the process of recording, reporting, analysing, interpreting and communicating of financial information

• recording will also involve identifying economic transactions and other financial events

• is to provide managers of the business with the necessary information they require to maximise the business’s performance

function of the accountant

• selection of design and maintenance of financial systems

• recording financial transactions

• producing financial reports for information for managers

• analysing reports

• (cost volume profit, capital budgeting techniques, budgets and performance reports)

accountants work in

public practice, corporations and businesses, government, charitable groups, community organisations

managers

internal users who are concerned with the day to day running of the firm

investors

external users who have financial interest in the firm

internal users

management and owners → main users of reports so they can make informed decisions about the business in a timely manner

auditor → could be internal or external (verify accounts)

external users →

lenders → loans will be paid when due

employees → knowing stable, more job security

customers → rectuatant for long term

government → regulate and tax

suppliers → ability for business to pay on time

financial accounting

• provides external reports

• provides information of financial position

• external users (investors, shareholders, lenders)

• assist them to make sound economic decisions and investing scarce resources

• must comply with accounting standards

• must be audited

management accounting

• provides specific information

• does not need to comply with accounting standards

• reports are not audited

• assists internal auditors

• up to date

external reporting

• it is the purpose of financial accounting

• it assist external users to asses (liquidity, performance, position)

• the mangers are accountable to external users and show they comply with laws

external reports

• statement of financial position (balance sheet)

• statement of comprehensive income

• statement of changes in equity

• statement of cash flows

type of reports

annual, half-yearly, concise annual

internal reporting

• supports management and the decisions they need to make

• assists in achieving goals

• no legal obligations

• flexible format

• (budget, variance, capital, cost)

internal reporting

• management → provide detailed reports, broad scope, specific

• similarities with financial → deal with economic events, both quantify and communicate information

internal audit

• continual review of the procedures, policies and systems of business to ensure they are being adhered to

• monitors the effectiveness of internal control

• detect and correct errors

• employees who carry out internal control

• internal audit reports are presented to management

difference between internal and external audit

external auditors focus on the accuracy of the annual report and financial statements whereas internal has a wide reaching brief which considers anything which might be important to an organisations success (internal control)

under/over investment of non-current assets

• under → less business growth, failure to meet customer needs

• over → lack of productivity, inability to repay debt, poor rate of return

under/over investment of cash

too little

• difficulties pay creditors

• possibility of insolvency increases

• opportunities missed

• loss of discounts from suppliers

• borrowing = higher financial cost

too much

• loss of interest

• loss of purchasing power

under/over investment of inventory

over

• storage costs

• lost investment opportunities

• theft

• insurance

under

• lost sales

• loss of production

under capitalisation

• insolvency problems

• overexposed to risk

• not able to expand to meet market demand

over capitalisation

• company earning are not sufficient to justify a fair return

• company is burdened with high interest charges