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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Accounting Lecture 1 Accounting Lecture 1

Sole Trader Partnership

– Sole trader will prepare accounts for an
accounting period but will be assessed to
Income tax on the trade - Corporation tax is
only charged on companies
– If the business goes bankrupt the owner may
have to sell his own personal assets to pay off
debts
– No legal requirements for a sole trader to
prepare accounts – prepared for tax purposes
and for banks
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• Partnership will have at least 2 owners –
often many more.
– Consists of a group of individual who have set
up in business together. Common among
professions- architects, solicitors, accountants
– May have been expanded from a sole trader
when more money was required in the business
– No legal requirement to prepare accounts – prepared for
division of profits, tax purposes and the bank.
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 Partnership
– A Partnership agreement should be drawn up
which will specify how the business will be run
e.g
• Money each partner will invest,
• Salaries if any to be paid to each partner
• How much each partner will work in the business
• How expenses of the business will be paid
• Bank accounts and cheque signatories
• In event of liquidation how the debts of the
partnership will be divided
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Accounting Lecture 1
Company
• This is a ‘Separate Legal Entity’
– Regarded as a separate entity from its owners
– A lot of legislation governs the operation of companies
• Irish Companies Acts and also EU legislation – legal rules
implemented by the courts
– Usually ‘Limited’ – can be Unlimited but is unusual
• Limited means that the liability of owners in event of winding
up the company or liquidation is limited to the amount of
money they have put into the company – won’t have to cash in
personal assets.
– 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
– Company must make certain audited information
available to the public banks etc. These groups need
protection as they may not get paid in the event of
liquidation due to the Limited liability of the company
• Annual report produces annual details of how the company is
doing
– Size of the company dictates the amount of information
that is required to be made public
– Companies office is in Dublin or can download
information online (for a fee)
– Shareholders receive Dividends
Enterprises
• Types of Businesses:
– Retail – Buy goods in a finished state, add markup and
sell them on – any Dunnes stores, PC world etc
– Manufacturing Business –buy components and put
together into a final product – medical device
companies, Food processing company
– Service business – selling their services or knowledge
e.g bank or Accountants or Architects

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

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Users - Management Users - Shareholders

– Need to plan and control what is happening in
the business
– Planning – e.g. introduce a new product, open
(or close) a store, reduce costs – maybe
redundancies. All decisions will be taken in
light of accounting information
– Controlling: e.g. to maintain sales as they are,
maintain price levels, ensure no increase in
costs
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Accounting Lecture 1
• 2. Shareholders/Future Investors. Analysts &
Advisors
– Might be individuals or shareholders if business is a
company. In a smaller business owners are likely to be
the management but less likely in the case of a larger
company
– Shareholders will want to see how their investment is
doing – share price will usually depend on the profits
• Dotcom bubble – share price high but no profits to back it up
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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
• 4. Customers and suppliers
– If a business is in trouble then less likely to buy
from them as would have no after sale backup
with say computer or other electrical (less in
retail – say food)
– Information likely to come from informal
sources or media
Users - suppliers
– Suppliers less likely to sell as may not be paid
• Assess credit rating with other suppliers
• Dun and Bradstreet assesses credit rating of
businesses using information in financial statements
• Good credit control department (accounts
receivable)

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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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