Study Zone Institute Teaching and learning made easy
When we talk about the purpose of accounting, it is more than just giving a definition of accounting. We can define accounting as the process of identifying, measuring and communicating economic information to provide owners of business and others with useful information to help them assess performance and make informed decisions.
The purpose of accounting tells us exactly why users want to know this useful information to assess performance and make informed decisions. Here are 5 important things to know when explaining the purpose of accounting.
5 Important things to know about the purpose of accounting
Profitability
Owners of businesses and users of accounting information want to know if the business is profitable. Making a profit is the main reason for starting a business.
Liquidity
A liquid business means that cash is readily available for paying off expenses and short-term debts. If the business has plenty cash and cash equivalents available, then it is successful.
Decision-making
Users of accounting information can tell if managers of the business are making sound decisions. A business that is profitable and liquid means that good decisions are being made.
Control
When explaining the purpose of accounting, remember that the records help to control the finances of the business. This means that users of accounting information can detect and prevent internal errors, fraud, theft, mismanagement, damages and losses.
Legal requirements
Finally, students must know that when talking about the purpose of accounting, it is lawful. It is the legal requirements of businesses to maintain an accurate financial record of their transactions and share the reports with the shareholders, tax authorities and regulators.
______________________________________
ALICE: Assets, Liabilities, Income, Capital, Expenses
Studying principles of accounts can be very easy once you learn which items are Assets, Liabilities, Capital, Income and Expenses. The accounts that fall under these 5 headings are used throughout your POA course. READ MORE
Assets: Owned fixed and liquid items with a debit balance
Assets are the items owned by a business. They are non-current also known as fixed or they are current also known as liquid. Non-current or fixed assets are those tangible or non-tangible items that have long life in the business. READ MORE
Liabilities: Owed long and short-term items with a credit balance
Liabilities are the items owed by the business. They are non-current also known as long-term or they are current also known as short-term. Non-current or long-term liabilities are items that are paid off in more than one year. READ MORE
Income: Earned, unearned and contributed money
Income is money that a business acquires that is earned, unearned and contributed. It has a credit balance in the ledger accounts when it increases and a debit balance when it decreases. READ MORE
Capital: Invested assets and the liquidity of a business
Capital is assets invested into a business and the term describes the liquid assets available to spend. Generally, both fixed and current assets represent capital but stakeholders are more concerned about the continuity of the business using cash and assets that can be turned into cash quickly to pay liabilities and expenses. READ MORE
Expenses: Spending that’s direct, indirect, operating and non-operating
Expenses are the goods, services and charges that a business incurs as it functions. It has a debit balance in the ledger accounts when it increases and a credit balance when it decreases. The cost of expenses in relation to earned income determines whether the business makes a profit or a loss. READ MORE
Debit and Credit: Simple view of in and out
Accounts are shaped like a T that has a left side called Debit or Dr and a right side called Credit or Cr. Debit means to have, increase, go up or come in and Credit means don’t have, decrease, go down or go out. A simple way to look at it is to say Debit and Credit mean to record the items that are in and out of the business. READ MORE
Increase and decrease of ALICE accounts
In the financial records of a business, the liabilities, income and capital accounts are responsible for the business having assets and expenses to function. ALICE accounts fluctuate consistently throughout an accounting period and it is necessary to know what it means for them to have an increase and decrease in balance. READ MORE
Accruals: How to record owed expenses and revenues in the Accounting Cycle
Accruals are monies owed either by the business or to the business. This happens when the business does not pay cash for expenses incurred within the accounting period or when cash is not received for income earned within the accounting period. READ MORE
Accounting Cycle: Complete basic accounting in 8 steps
If you research Accounting Cycle, you would be bombarded with versions that might make your head spin. This article focusses on basic accounting for small business owners and students to understand the steps involved when recording the financial performance of a business. READ MORE
Journals: Complete 7 Day Books with 4 types of transactions
Posting to Journals is step 2 of the Accounting Cycle. After sorting out your Source Documents into cash and credit transactions, it is time to record the amounts in the 7 Journals, also called Day Books and Books of Original Entry. READ MORE
Ledger accounts: Simple breakdown of Types, Format, Double Entry, Balance
Ledgers is the third step in the Accounting Cycle. After you sort out Source Documents and record the amounts into the 7 Journals, the figures then go to the ledger accounts. Each account records details of every activity that happens in a business. READ MORE
Trial Balance: 6 important things to know
The Trial Balance is the 4th step in the Accounting Cycle. It is the nail-biting moment for students of accounting. It tells you a lot about your performance thus far, and can leave you feeling frustrated or relieved when you’re done. READ MORE
Income Statement: 6 key points for reporting profitability
The Income Statement is the next step in the Accounting Cycle after the Trial Balance is finalised. It is one of 3 financial statements that is prepared by an accountant. The other 2 are Balance Sheet and Cash Flow Statement. READ MORE
Balance Sheet: 10 key parts of the statement of financial position
The Balance Sheet is the next step in the Accounting Cycle after the Income Statement is completed. It is one of 3 financial statements that is prepared by an accountant. The other 2 are Income Statement and Cash Flow Statement. READ MORE
Cash Book: How to record cash, bank and discounts
“Cash is King” is a common saying in business. While satisfying your passion and filling the needs of consumers are also rewarding, the handling of cash and cash equivalents is the main concern of any business owner. This is why the Cash Book is dedicated to recording all transactions that involve cash, cheques and bank transfers. READ MORE
7 Key financial ratios students should know in basic accounting
Financial ratios are calculated to analyse the performance of a business using figures in the financial statements. When learning the principles of accounting, you should be aware of the figures presented in the Income Statement and Balance Sheet. READ MORE
You must be logged in to post a comment.