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Introduction to Accounting Chapter 1 © Luby & O’Donoghue (2005)

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1 Introduction to Accounting Chapter 1 © Luby & O’Donoghue (2005)

2 Nature and purpose of accounting “...The process of identifying, measuring and communicating economic information about an organisation or other entity, to permit informed judgements and decisions by the users of the information” (American Accounting Association)

3 Accounting is concerned with The recording of data or transactions. Classifying and summarising the data. Communicating the outcomes of the above.

4 Types of organisation Sole trader Partnership Company By Legal Form

5 Sole-trader This is where the business is owned and run by one person or a family. No difference between the assets of the business and the assets of the owners. If a business fails the courts can order the sale of the owners private assets to pay back the debts. This is known as unlimited liability. Sole traders are generally small business Financial statements of sole-traders are not governed by law Only requirement is for the Revenue Commissioners.

6 Partnership This is where two or more people own, run and share the profits and losses of the business. The risk is shared. It may be easier to raise finance as more collateral is likely to be available to raise capital/loans. Partnerships have unlimited liability. Are not required to publish their accounts except to the Revenue Commissioners.

7 Company A legal structure whereby the owners of the business are only legally liable to the value of whatever they have invested in the business. The private assets of the owners are not at risk if the business experiences financial difficulties. Involves setting up a legal persona. Registration with the Registrar of Companies is required. Companies must publish information about their operations, financial transactions and results.

8 Employees Customers Loan providers Government Creditors/suppliers Public Investors Management Stakeholders – users of accounting information The Business

9 Accounting elements “…the collection, measurement, recording, classification and communication of economic data relating to an enterprise for the purposes of reporting, decision making and control”. American Institute of Certified and Public Accountants

10 Accounting Elements Management Accounting Classifying And Recording TransactionsClassifying TransactionsPreparing and Publishing FinancialStatementsPreparing FinancialStatementsPlanning, Forecasting and ControlPlanning, ControlInformation For Management DecisionMakingInformation DecisionMaking Financial Accounting

11 Financial and Management Accounting Financial Accounting Financial Accounting involves the recording of business transactions, and summarising and communicating that data through uniform financial statements or final accounts. Management Accounting Management Accounting involves producing internal reports to help management plan, manage more effectively, assist in control and to improve the decision making process.

12 Financial v Management Accounting Financial Accounting Management Accounting Primary usersExternal (shareholders)Internal (management) Type of informationSummarised balance sheet, profit &, and cash flow A range of very detailed and specifically focused reports FrequencyOnce/twice a yearAs required by management - usually weekly / monthly Time focusHistoricBoth historic and future focus Format of accounting governed by Company’s Acts and standards issued by the accounting profession. Not governed by legislation or standards

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