The function of Accounting: accounting method for similar items from one period to another.

A change
- Recording transactions is allowed only if it can provide a more accurate view. Accrual Concept
- Classifying data (Revenue should be recognized when earned and expenses should be
- Summarising data recognized when incurred, not when money is received or paid.)
- Communicating information
Importance of Accounting: A = (C+R+E-D) + L A+D+E = C+L+R
- Reporting
- Planning
- Controlling
Financial Acct: Ex&internal users; info on profitability, financial stability,
overall financial performance, operating result(IS); Standard format,
regular basis.(BS/SoFP: Liquidity, Solvency, long-term growth potential,
financial position.)
Management Acct: Internal; cost and pricing, operation efficiency;
Non-standard format, available anytime
Acct cycle: A series of standard procedures for recording and processing a
firm’s accounting data in a certain period.
1. Collecting&verifyug sources documents for transaction
2. Recording transaction in bk of original entry
3. Posting double entry
4. Balancing off the accounts
5. Trial Balance
6. Preparing balancing day-adjusting entries
7. Prepare financial statements
8. Closing entries
Trial balance: Def: A list of all the dr.&cr. Balance of ledger accounts at
the end of a period. /To detect errors made in the recording of transactions/
Form a basis for the preparations of financial statements/ Only can detect
double entry or arithmetic errors, bookkeeping errors cannot be detected.
Ledger accounts:
Personal accts: Individuals/entities having transactions with the firm
(Trade/Other receivables, Trade/Other payables)
Impersonal accts: anything not personal accts
Nominal accts: accts that will be closed off after the end of an accounting
period. (Expenses/revenue.)
Real accts: accts will be carried forwards to the next period (assets,
liabilities, capital)
Users:
Business owner (decide if the business shd be continued, or put more funds
and resources)
Management (resources allocation); Employees (stay or not)
Lender (lend money or not); Potential investor (invest or not) Gross profit = Net Sales - COGS; Net Sales = Sales - RI
Supplier (know if the firm can pay on time if they sell goods on credit); Net Profit = GP + other revenue - E Net purchases = Purchases-RO
Customer (know if the firm can keep on supplying them good COGS = Opening inventory + Net purchases + carriage inwards - closing
services/goods); Gov (need to know the tax payment of the firm; Police inventory
whether to prosecute criminals crims)
Limitations:
Different acct methods(Misleading); Reporting oast results (irrelevant to
current/future decision making); Involvement of personal judgement
(subjective, errors, manipulation and fraud); Lack of qualitative info
(crucial and relevant to the decision, e.g. staff morale.) Assets valued at
historical cost (cannot reflect their true worth since not based on actual
value) Provide a summary without details (may not be aware of the hidden
issue.)
Fundamental acct assumptions (Def: rules to follow when recording daily
transactions, and preparing financial statements) (Purpose: make
accounting info accurate, uniform and useful to different users):
Fundamental acct assumptions: Business entity concept (A business is
treated as an entity separate from its owner. Only transactions affecting the
business should be recorded). Historical Cost principle (Assets of a
business are valued at their original cost of purchase or production. Any
changes in market value should be ignored.) Going Concern Concept (It is
assumed that a business will continue to operate for the foreseeable future
with no intention to liquidate the business or cease operations, or
significantly reduce its scale of operation, Thus, assets are valued at
historical cost.) Consistency Principle (A firm should keep using the same