Topic 1: Introduction to Accounting

 

What is accounting?

 

Accounting is the process of recording, reporting, and interpreting financial information pertaining to an organization.

 

What is the difference between accounting and book-keeping?

 

Book-keeping is the recording, routine-like and clerical aspect of the accounting process. However, accounting includes other aspects which require analytical and communicative skills.

 

The Accounting Cycle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 1: Book-keeping only involves stage 1 to 3 in a cycle

Note 2: Accounting involves stage 1 to 5 in a cycle

 

Who are the users of accounting information?

Internal Users:

  • Management – planning, control and running of the business

  • Employees – stability and prospects of their jobs 

 

External Users:

  • Investors – safety and profitability of their investment

  • Lenders – ability of the business to repay loans

  • Suppliers – ability of the business to pay for goods and services provided.

  • Customers – continuity of the business

  • Government – observation of regulations and taxation obligation

  • Public – general economic interest and business opportunities

 

What is the difference between cash and credit transactions?

A transaction refers to any economic event or activity that affects the financial condition of a business and must be entered into the accounting records.

 

There are two types of transactions:

· Cash transaction – for which immediate payment is made.

· Credit transaction – for which payment is postponed to a future date.

 

Usefulness and Limitations of Accounting Information

Accounting information is mainly about past activities, i.e. it is historical in nature. It may be used to predict certain matters and to help in planning for the future.

However, accounting does not capture non-financial information such as:

  1. The environment in which the business operates;

  2. The level of technology used;

  3. How skilful or capable the employees are

 

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