Fundamentals of Accounting -Unit 1

UNIT 1

WHAT IS ACCOUNTING?

WHAT IS ACCOUNTING?

Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of that information.

What is another name for accounting?

"Language of Business".

Accounting can be viewed as:

It can be viewed as an information system that provides essential information about the financial activities of an entity to various individuals or groups for their use in making informed judgments and decisions.

What is accounting information system?

It is the full components that, together, comprise all the inputs, storage, and transformation processing, collating, and reporting of financial transactions

What are the objectives of accounting?

·         if they are making a profit or loss

·         what their business is worth

·         how much cash they have

·         how wealthy they are

·         how much they are owed

·         how much they owe to someone else

·         what a transaction was worth to them

What is the primary objective of accounting?

to provide information for decision-making.

what are the three types of business?

Types of business: Sole proprietorship, Partnership, Corporation.

Define a sole proprietorship business

A type of business in which a single individual owns and operates the company. This person is solely responsible for all aspects of the business, including finances, decision-making, and legal liabilities.

Define a partnership business

A partnership business is a type of business entity in which two or more individuals together to carry on a business for profit.

Define a corporation business

A corporation is a legal entity that is separate from its owners and is formed to conduct business. It is owned by shareholders who elect a board of directors to oversee the management of the corporation. The corporation has limited liability, meaning that the shareholders are not personally responsible for the debts and obligations of the corporation.

Three disadvantages of a sole proprietorship business

1. Unlimited liability

2. Raising capital is limited

3. Life of business is limited

Three advantages of a sole proprietorship business

1. Simple to establish

2. Owner controlled

3. Less statutory regulations

What are three disadvantages of a partnership?

1. Unlimited liability

2. High risk of disagreements

3. Decision-making may take longer

What are three advantages of a partnership?

1. Simple to establish

2. Shared control

3. Broader skills and resources

What are three disadvantages of a corporation business?

1. Expensive to establish

2. The affairs of the company are public

3. Reporting may be complex

What are three advantages of a corporation business?

1. Easier transfer of ownership

2. Easier to raise funds

3. No personal liability

What is the purpose of financial information?

The purpose of financial Information is to provide inputs for decision making

Who are internal users?

Internal users of accounting information are managers who plan, organize, and run a business. These include marketing managers, production supervisors, finance directors, and company officers

What is the purpose of accounting for internal users?

For internal users, accounting provides internal reports, such as financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year.

Who are external users?

Investors (owners): use accounting information to make decisions to buy, hold, or sell stock.

Creditors: such as suppliers and bankers use accounting information to evaluate the risks of granting credit or lending money.

Taxing authorities: such as the Inland Revenue Service want to know whether the company complies with the tax laws.

Regulatory agencies: such as the Jamaica Stock Exchange will want to know whether the company is operating within the prescribed rules.

Who are the users of the International Accounting Standards Board (IASB) Framework

1. Investors: The providers of risk capital. They need the information to help them determine whether they should buy, hold or sell

2. Lenders: Lenders are interested in

information that enables them to determine whether their loans and related interest will be paid when due.

3. Suppliers: Suppliers and other trade creditors are interested in information that enables them to determine whether amount owing to them will be paid when due

4. Customers: Customers have an interest in information about the continuance of an enterprise,

5. Employees: Employees and their representative groups are interested in information about the stability and profitability of their employers

6. Government: Government and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises

7. Public: Financial statements may assist

the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.

What are the three types of business activities?

1. Financial activities: Loans/Short term credit from

suppliers, Issue of shares/equity, Bank overdraft

2. Investing activities: vehicles, buildings, furniture, computers, and machinery

3. Operating activities: sales revenue, service revenue and interest revenue

What is the purpose of the statement of profit and loss?

To show how profitable the enterprise was during the period

What is the purpose of the statement of financial position?

To present a picture at any particular point in time of the assets owned by a business and the liabilities owned by it

What is the purpose of the statement of changes in equity?

To indicate how much of previous income was distributed to you and the other owners of the business in the form of dividends, and how much was retained in the business to allow for future growth