Introduction to
Accounting
Chapter 1
© Luby & O’Donoghue (2005)
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)
Accounting is concerned with
The recording of data or transactions.
Classifying and summarising the data.
Communicating the outcomes of the above.
Types of organisation
Sole trader
By Legal Form
Partnership
Company
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.
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.
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.
Stakeholders – users of
accounting information
Employees
Management
Investors
The Business
Public
Creditors/suppliers
Customers
Loan providers
Government
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
Accounting Elements
Classifying
And Recording
Transactions
Preparing
and Publishing
Financial
Statements
Financial Accounting
Planning,
Forecasting and
Control
Information
For Management
Decision
Making
Management Accounting
Financial and Management
Accounting
Financial Accounting involves the recording of
business transactions, and summarising and
communicating that data through uniform
financial statements or final accounts.
Management Accounting involves producing
internal reports to help management plan,
manage more effectively, assist in control and
to improve the decision making process.
Financial v Management
Accounting
Primary users
Type of information
Financial
Accounting
Management
Accounting
External (shareholders)
Internal (management)
Summarised balance sheet,
profit &, and cash flow
A range of very detailed and
specifically focused reports
Frequency
Once/twice a year
As required by management usually weekly / monthly
Time focus
Historic
Both historic and future focus
Company’s Acts1963-1990 and
standards issued by the
accounting profession.
Not governed by legislation or
standards
Format of accounting
governed by
Accounting Standards
(Accounting Bodies)
Legislation
(Irish Government)
Regulatory
Framework
Yellow Book
(Stock Exchanged requirements)
EU Directives