1.1 and accurately. Inaccurate records result in a risk of incorrect decision-making which can have serious consequences. For example, if expenses are not recorded then a manager may buy more materials than can be afforded out of the business bank account. Book-keeping involves recording transactions in the ‘books’ of the business. These books are divided up by type of transaction. Transactions are recorded in two separate places: • All similar transactions are recorded in specific books according to the type of transaction. These are known as books of prime entry (explored in Unit 2.3). • Transactions are also recorded in the ledger accounts of the business. The ledgers (explored in Unit 2.1) contain the accounts of the business.
Accounting Book-keeping involves the recording of financial transactions within a business. The activity of accounting includes bookkeeping but also involves other activities. Accountants use the financial records produced by those completing book-keeping. The records are used to construct the financial statements of the business. These statements tell users of accounting data important information about the state of the business. Two important financial statements are: 1
The income statement, which shows the profit earned or loss made by the business
2
The statement of financial position, which shows business resources and how those resources are financed.
Key terms Accounting: The process of recording financial transactions, producing financial statements and analysing financial performance of a business. Financial statements: Statements produced for an accounting period summarising business performance. They include an income statement and a statement of financial position
Another function of accounting is to analyse the financial performance of the business. This involves using financial data from the financial statements to assess how well the business is performing.
The purpose of measuring business profit and loss Business objectives are the aims and goals of a business. Most businesses have profit-related objectives. Profit maximisation is a common business objective. This is where the business aims to make as high a level of profit as is possible. Other business objectives include:
Key term Profit maximisation: Aiming to earn as high a level of profit as is possible.
• Growth – measured by sales value or by sales volume (the quantities of goods sold) • Market share (how much of the market the businesses’ sales account for)
Chapter 1: The fundamentals of accounting
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