Chapter 1: The purpose of Accounting
Book-keeping vs. Accounting
Bookkeeping Accounting
• Is a process of detailed recording of • Accounting involves collecting and
all the financial transactions of a recording, classifying, summarizing,
business analyzing and interpreting and
• Basis of maintaining is double entry communicating financial data.
system of book-keeping • Uses the bookkeeping records to
• Important – it ensures the records of prepare financial statements at regular
all financial transaction of a business interval
has undertaken are accurate, up-to- Income statement
date and comprehensive. Statement of Financial Position
Financial data refers to any aspect of a Financial Statements are made up of an
business that can be measured in Income Statement and a Statement of
terms of money. Financial Position
Accounting process
• Collecting and recording – collect and keep business
document & use it to do recording
• Classifying financial data – classified as assets, liabilities,
income or expenses
• Summarising financial data – prepare statement of profit &
loss which will show business profit or loss
• Analysing financial data – examining something in detail to
explain & interpret
• Interpreting financial data – deciding what the intended
meaning of something is
• Communicating financial data – summarized data made
available to the interested parties
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Financial Statements
Financial Statements
Statement of Profit and Statement of Financial
Loss Position
(Trading section & profit & (assets, Equity & Liabilities
loss section) sections)
See profit/loss made by Show the net worth of the
the business business
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Role of technology in Accounting
• Bookkeeping & accounting become easier
• Acctg software automates the recording,
organizing & calculation of financial data
• Adv: reduce errors & save times compared to
manual methods
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Purpose of accounting
i) Provide important financial information that helps
interested parties to monitor the progress of the business
Interested party: - managers/owners can use
financial data to analyse the opportunities and challenges
ii) Helps with good decision making. For e.g. if profit have
been falling action such as cost cutting can be taken
iii) Inform interest parties what a business is worth
– Interested parties informed about assets, liabilities
and net worth of a business so they can make
decision before taking any action.
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The purpose of measuring business profit & loss
Main business aim is to make profit. Business can measure the profit in
order to:
1. make comparison with previous years performance.
i) Action to take if profit is falling: increase revenue or focus
on decrease expenses [get cheaper supplies (quality??)]
ii) If profit consistently good – manager can take action to
grow the business by adding new product(s), expand the
business by opening new branch.
2. Compare with competitor’s profit. Can do advertising to be
better.
3. Help in measure a business’ ability to pay the highest returns
to the owners relative to the competitor.
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Users of Accounting information (interested parties)
• The owner(s) – how investment in the business is doing
• The manager(s) – the stewards of the business, responsible to increase profitability and
future prospects of the business. Use information for decision making (planning,
controlling)
• Prospective investors – they want to know how well their investment will do in the
future by studying the present and past accounting records of business they are intending
to invest
• Bank manager – want to study the present and past accounting records of business
before granting loan
• Credit suppliers (Trade payables) - want to know whether the business have enough
money to pay debt, how long a debt can be settled.
• The government (tax authorities) – want to the profit in order to calculate the tax
• Club members – want to know whether the club can provide facilities as mentioned, can
be expanded and continue the operation in future
• Employees – job security & future promotion
• Customers – (end-user, retailers or manufacturer) – want continue supply of the products
• Competitor – to make comparison of performance & for ratio analysis
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• General public (job seeker, financial analysts, researchers, students)