Accounting and the

Business Enviornment
BY UJALA SHABAN RASUL
Introduction to Accounting 2

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Accounting 1)
Accounting and the Business Enviornment (Financial
 Accounting
 Accounting is the study of collecting, recording, summarizing and interpreting
accounting information in business books
 
 Purpose of Accounting
 • To monitor progress
 • To prepare financial statements
 • For decision making
Users of financial statements 3

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Accounting and the Business Enviornment (Financial
 Owners of the business
 Managers of the business
 Trade payables: to whom the business has to pay
 Banks: related to business and others too
 Investors : the ones who have invested money in the business
 Other interested parties such as governments, tax authorities, etc.
Assets 4

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Accounting and the Business Enviornment (Financial
 Assets 
 Something a business owns or which is owed to the business
 It can be categorized into two main types 
 1. Non-current asset
 An asset is categorized as non-current asset if
 • It is held for more than 12 months,
 • It is not for resale
 Examples: Building, machinery, vehicle, premises, furniture and fixtures 
 2. Current assets
 Assets that are convertible into cash within a year are called current assets
 Examples: Trade receivables, Inventory, Bank balance, Cash in hand
Liability 5

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Accounting 1)
Accounting and the Business Enviornment (Financial
 Something which a business owes to a third party
 It can be categorized into two main types.
  
 1. Non-current liabilities
 Debts to be paid after 1 year
 Long term Bank loans, Long term borrowings
  
 2. Current liabilities
 Debts to be paid within a year
 Trade Payables, Bank overdraft (overdraft means that the bank allows customers to borrow
a set amount of money)
More accounting terms 6

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Accounting and the Business Enviornment (Financial
 Owner equity (Capital)
 The funds put into the business or contributed by the owner.
 The amount owed by the business to the owner
 Expenses  
 An amount paid to cover day to day expenditures for running the business
 Examples: Rent, insurance, wages, repairs and maintenance
 Revenue
 An amount earned by the business from trading activities.
 Examples: Sales, commission received, rent received, discount received
The purpose of financial accounting 7

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Accounting 1)
Accounting and the Business Enviornment (Financial
 Financial accounting is a term that describes:
  maintaining a system of accounting records for business transactions and other
items of a financial nature; and
  reporting the financial position and the financial performance of an entity in a
set of financial statements.
 The term entity is used to describe any type of organisation. Business entities
include companies, business partnerships and the businesses of ‘sole traders’
Regulation of financial reporting 8

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Accounting 1)
Accounting and the Business Enviornment (Financial
 Financial reporting is regulated and controlled. Regulations help to ensure that
information reported in financial statements has the required qualities and content.
 The concepts, principles, conventions, laws, rules and regulations that are used to
prepare and present financial statements are known as Generally Accepted
Accounting Principles or GAAP.
 The main sources of GAAP in a jurisdiction are:
1. Company Law; and
2. Accounting standards
 GAAP varies from country to country, because each country has its own legal and
regulatory system. For example, there is Pakistan GAAP, US GAAP etc.
contd 9

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Accounting and the Business Enviornment (Financial
 Many countries and companies whose shares are traded on the world’s stock
markets have adopted International Financial Reporting Standards or IFRS. These
are issued by the International Accounting Standards Board (IASB).
 Accounting and the Business Enviornment (Financial
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Accounting 1)
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