Chapter One: Introduction to Accounting

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Accounting and Finance: An Introduction Chapter One Notes.

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Chapter One: Introduction to Accounting
  1. Stakeholders: Stakeholders are people who have an interest or dealing with the business.
    1. Owners, They have an interest in the business because they want to see whether the organisation is making any money and make sure that the pay of those higher up is sensible
      1. Customers have an interest in the business as to what they sell whether they can provide what they need and at reasonable prices.
        1. Competitors what to be able to see if they can realistically go up against the company and also see if there is anything different that they can offer that their opposition can't.
          1. Employees (and their representatives) want to be able to know if the pay is fair, whether there may be layoffs in the future and also whether they should be demanding more pay from the organisation.
            1. The government want to know whether they should be paying taxes and how much they should be paying.
              1. Investment analysts whether they should advise people to invest in the organisation or whether they should sell shares etc.
                1. Suppliers want to know whether they are going to be paid and if the turn over is going to cover it.
                  1. Lenders want to be able to see whether they are likely to get their money back in the future and whether the money lent is likely to be used for the intended purposes
                    1. Managers want to know how the business is doing and whether it may need to be closed and areas that need to be improved.
                    2. Accounting information should make a difference.
                      1. THE TWO FUNDAMENTAL QUALITIES
                        1. The information should be relevant. Therefore it must be material meaning that it's omission would make a difference to the persons decisions.
                          1. It should also be a faithful representation. This means it should be complete, free from bias and as free from error as much as possible
                          2. OTHER USEFUL QUALITIES
                            1. You should be able to compare the data, not only to itself but to other years and in other companies in order to make reasonable deductions about progress, performance and other indicators.
                              1. It should be verifiable meaning that it can be backed up by evidence and is generally accepted as correct by more than one person.
                                1. Timeliness is also important. The information should be created when it is needed as that will be when it is most helpful.
                                  1. Accounting information should be clear and concise making it understandable to most people.
                                2. Differences between Management and Financial Accounting!
                                  1. Financial accounting reports tend to be general purpose and are aimed at a wider audience, whereas management accounting reports often have a specific purpose.
                                    1. Financial accounting reports offer a broad over view when it comes to the level of detail whereas management accounting reports normally have a large amount of detail.
                                      1. Financial accounting reports are subject to rules and regulations whereas management accounting reports are normally for in house purposes and are not subject to the same regulations
                                        1. Financial reports are produced mainly on an annual basis (maybe bi annual depending on the organisation). Whereas management reports are created as and when they are needed and also as often as they are needed.
                                          1. Financial reports use information that can be measured and expressed in monetary terms whereas management reports can be less objective and verifiable.
                                            1. Financial reports look at the past events of the organisation and management reports are normally forward thinking.
                                            2. The Environment in which organisations work has become more turbulent and competitive
                                              1. The can be due to the increase in sophistication of customers who are no longer passive.
                                                1. This has been pushed forward due to rapid changes in technology.
                                                  1. There is also an increase in volatility in financial markets.
                                                    1. Because of the new scale of the industry there has been increasing pressure to create a universal set of rules and regulations to follow so that internationally accounting can be understood. These are the International Financial Reporting Standards (IFS's)
                                                      1. Companies are more customer driven and the terms "the customer is king" have come in.
                                                      2. TYPES OF BUSINESS OWNERSHIP
                                                        1. SOLE PROPRIETORSHIP
                                                          1. Where one individual is the owner of a business.
                                                            1. These types of organisations are easy to set up and have no formal procedures to undergo.
                                                              1. The business will cease on the death of the owner.
                                                                1. There is no legal requirement for accounting information to be produced.
                                                                  1. A sole Proprietor has unlimited liability meaning that any debts incurred that the business can't pay off will need to be paid off with the owners own money.
                                                                  2. PARTNERSHIP
                                                                    1. Two or more individuals set up a business together. This means all the choices and work is split between all the owners.
                                                                      1. They are easy to set up and require no formal procedures.
                                                                        1. Normally the partners have unlimited liability meaning it is up to them to pay off any debt the organisation can not pay off.
                                                                          1. LLP: Limited Liability Partnership
                                                                          2. A LIMITED COMPANY
                                                                            1. There can be an unlimited number of owners of the organisation.
                                                                              1. The liability is limited so that you only have to cover as much debt as you put into the company meaning you are not left to pay off all debts that may be incurred.
                                                                                1. The owners aren't normally part of the day to day running of the company. This is left to managers or a board of directors.
                                                                                  1. To start a limited company you are required to fill out forms of incorporation.
                                                                                    1. There is a requirement to provide financial reports and in larger companies there is a requirement to have their reports auditted.
                                                                                      1. PLC: Public Limited Company
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