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Learning objectives Definition of Accounting

• Understanding of meaning and purpose of • The process


‘accounting’ – of identifying, measuring, and communicating
• Ability to differentiate between different – economic information
types of business entities – to permit informed judgements and decisions
• Knowledge of users of accounting – by users of that information
information and their needs
(American Accounting Association)
• Understanding of difference between
financial and management accounting
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Purpose of Accounting Sole Trader


• Purpose of Financial Statements is to • Sole Trader is where the business is owned by one
inform user groups about the financial person. They have started the business with their
position and performance of an entity own money. Although owned by one person there
may be any number of people actually working in
• Financial Statements are prepared for the the business as employees
following entities:
– Sole Trader • The Sole Trader should ensure that the business is
– Partnership conducted separately from their own personal
– Company matters e.g Separate bank account
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Sole Trader Partnership


– Sole trader will prepare accounts for an • Partnership will have at least 2 owners –
accounting period but will be assessed to often many more.
Income tax on the trade - Corporation tax is
– Consists of a group of individual who have set
only charged on companies
up in business together. Common among
– If the business goes bankrupt the owner may professions- architects, solicitors, accountants
have to sell his own personal assets to pay off
– May have been expanded from a sole trader
debts
when more money was required in the business
– No legal requirements for a sole trader to – No legal requirement to prepare accounts – prepared for
prepare accounts – prepared for tax purposes division of profits, tax purposes and the bank.
and for banks
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Partnership Company
– A Partnership agreement should be drawn up • This is a ‘Separate Legal Entity’
which will specify how the business will be run – Regarded as a separate entity from its owners
e.g – A lot of legislation governs the operation of companies
• Money each partner will invest, • Irish Companies Acts and also EU legislation – legal rules
implemented by the courts
• Salaries if any to be paid to each partner
• How much each partner will work in the business – Usually ‘Limited’ – can be Unlimited but is unusual
• How expenses of the business will be paid • Limited means that the liability of owners in event of winding
• Bank accounts and cheque signatories up the company or liquidation is limited to the amount of
money they have put into the company – won’t have to cash in
• In event of liquidation how the debts of the personal assets.
partnership will be divided
– Amount of money put into a company is in the form of
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shares
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Company Company
– Company can be small – may just have 2 shareholders • Company can be a Public Limited Company
– lot of people set up a company for running a business (PLC) or a Private limited Company e.g Dunnes
because it is more tax efficient – tax rates on profits of Stores
a company are lower than income tax rates.
– A public limited company must make its shares
– Company is assessed to Corporation tax available to the public – usually by being quoted on a
– Directors run the company, they may or may not be Stock exchange
shareholders • ISEQ (Ireland)
– Limited company must make this fact known in their • FTSE (London stock exchange)
name that e.g Computers Ltd or Builders Ltd • NASDAQ (US – Tech stocks)
• NYSE (Dow Jones)

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Different forms of Business


Company
Enterprises
– Company must make certain audited information • Types of Businesses:
available to the public banks etc. These groups need
protection as they may not get paid in the event of – Retail – Buy goods in a finished state, add markup and
liquidation due to the Limited liability of the company sell them on – any Dunnes stores, PC world etc
• Annual report produces annual details of how the company is – Manufacturing Business –buy components and put
doing together into a final product – medical device
– Size of the company dictates the amount of information companies, Food processing company
that is required to be made public
– Service business – selling their services or knowledge
– Companies office is in Dublin or can download e.g bank or Accountants or Architects
information online (for a fee)
– Shareholders receive Dividends

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Business Enterprises Users of Accounting Information
• Other types or organisations might be hospitals, • 1. Management of a business
schools, Inst. of Tech, Churches
• In existence for reasons other than to make a profit – Private sector – aim is to make a profit
– These organisations still need to maintain accounting • All functions of the business (production, sales, marketing)
records – at a minimum details of income and aim to sell something that people wish to buy and thus make a
expenditure and a bank reconciliation profit
– Funding has to be accounted for • Information required monthly, quarterly, annually (daily)
– Abbey Theatre – Public sector (hospitals, universities etc) have other
– If good accounting records are not kept then fraud can aims but still need to keep accounting records
easily take place

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Users - Management Users - Shareholders


– Need to plan and control what is happening in • 2. Shareholders/Future Investors. Analysts &
the business Advisors
– Planning – e.g. introduce a new product, open – Might be individuals or shareholders if business is a
(or close) a store, reduce costs – maybe company. In a smaller business owners are likely to be
the management but less likely in the case of a larger
redundancies. All decisions will be taken in
company
light of accounting information
– Shareholders will want to see how their investment is
– Controlling: e.g. to maintain sales as they are, doing – share price will usually depend on the profits
maintain price levels, ensure no increase in • Dotcom bubble – share price high but no profits to back it up
costs
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Users - shareholders Users - Employees


– Whether to invest in the company or not • 3. Employees: – Security of employment
– Decisions to be taken at general meetings and wage negotiations
AGM, EGM etc – Might never look at set of accounts but will be
‘word of mouth’ factor about how the business
• Management performance is doing
• Dividend payout
• Future performance

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Users - Customers Users - suppliers
• 4. Customers and suppliers – Suppliers less likely to sell as may not be paid
– If a business is in trouble then less likely to buy • Assess credit rating with other suppliers
from them as would have no after sale backup • Dun and Bradstreet assesses credit rating of
businesses using information in financial statements
with say computer or other electrical (less in
• Good credit control department (accounts
retail – say food)
receivable)
– Information likely to come from informal
sources or media

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Financial vs Management
Users – other institutions
Accounting
• 5. Banks • Financial Accounting
– Will require financial statements to give loans or start – Produces the financial statements
up capital • Income Statement (statement of comprehensive
• 6. Government Agencies: income), Balance Sheet (statement of financial
position), Cash Flow Statement,
– Corporation Tax calculations, VAT, PAYE/PRSI
– External Focus
– Statistical returns based on financial information e.g
amount of exports, no of employees etc – Governed by Company Law, Accounting
– Heavy fines for non-compliance Standards
– Produced annually

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Financial vs Management
Accounting
• Management Accounting
– Planning & Control Orientation
– Internal focus
– Primarily used by managers
– Produced as required
– Budgets, costing of products, pricing of goods

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