Business Basics St.

Catherine High School Grade 8

Introduction to Accounting Terminologies

Purpose of Accounting

The main objective of accounting is to record financial transactions in the books of

accounts to identify, measure and communicate economic information.

Users of Accounting Information.

Users of accounting information are internal and external.

Prepared by S. Morgan Revised by S. McKenzie

Business Basics St. Catherine High School Grade 8

a. Internal - Owners, managers and employees.

Owners

The owners of businesses use accounting information for the following purposes:
● To understand the financial health of their business, whether the business is
making a profit or a loss
● To set organizational goals
● To evaluate the progress the organization is making to achieving those goals
● To take corrective action where needed

Managers

Accounting information is of great assistance to management for planning,

controlling and decision making process. Managers use the information to evaluate
the performance of the organization and position, so that the necessary measures
may be taken to bring improvements in terms of business results. Besides,
accounting information is useful to help managers to do their jobs better.

Employees

Because the company's financial health affects their salary reviews, bonuses, and
other financial and non-financial advantages, employees are curious about
accounting information. The employees would also need this information to know
whether the company had the financial resources as well as the amount of sales and
profitability of business to offer long-term employment, increased wages, etc.

b. External- Creditors, investors and government.

Creditors (Lenders)

Creditors are interested in accounting information, because it enables them to

determine the credit worthiness of the business. The credit terms and standards are
set on the basis of the financial health of a business, so, it helps them to analyze by
using the accurate information accordingly. Creditors include suppliers and lenders
of finance, such as banks and credit unions. Trade creditors are generally more
interested in the accounting information for a short period of time than lenders.

Prepared by S. Morgan Revised by S. McKenzie

Business Basics St. Catherine High School Grade 8

Investors

They require the information because they are concerned about the risks and
returns associated with investing. Before they give the company any financial
resources, they must conduct an assessment since it is important to determine
whether it is feasible (possible) to invest in the company.

Government

A further class of external user is the government, which is similarly concerned

with a company's performance for a variety of regulatory as well as tax-related
reasons. Businesses must provide accounting information to government
organizations in order for them to assess taxes efficiently and correctly. These
organizations might compute the revenues produced for the government incorrectly
in the absence of accounting information.

Accounting Equation

Assets - Liabilities = Capital

Classification of terms as assets, liabilities and capital.

a. Assets - Things that the business owns e.g.: Land, Cash in hand, Machinery,
Office Equipment, Fixtures, Motor Vehicle etc.

b. Liabilities - Things/ persons that the business owes. E.g.: Creditors

c. Capital - Money used to start or invest in a business.

Prepared by S. Morgan Revised by S. McKenzie

Business Basics St. Catherine High School Grade 8

ACTIVITY 1 - In Class
Place the following under their appropriate headings:
1. Buildings 4. Creditors - J Brown, H Nelson
2. Land 5. Money used to start business
3. Cash 6. Motor Vehicle

ASSETS CAPITAL LIABILITIES

ACTIVITY 2 - In Class
Use the accounting equation to find your assets.
Assets =?
Creditors (Liabilities) = $37,000
Capital = $500,000
Assets - Liabilities = Capital

ACTIVITY 3 - Homework
Create a glossary of basic accounting terms for discussion in the next class.
1. Bank 7. Creditor
2. Bookkeeping 8. Loan
3. Balance Sheet 9. Stock
4. Profit 10.Discount
5. Loss 11.Receipt
6. Debtor 12.Payment

Prepared by S. Morgan Revised by S. McKenzie