1.1 The Purpose of Accounting

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1.1 The Purpose of Accounting

Definitions:

Accounting is the process of systematic recording, reporting, and analysis of financial transactions of a business.

Book-keeping The process of recording daily financial transactions


Book-keeping vs. Accounting


Book-keeping: The process of recording daily financial transactions in a consistent way. It is a part of the larger field of accounting.

Example: Recording sales, purchases, receipts, and payments.

Accounting: Involves interpreting, classifying, analyzing, reporting, and summarizing financial data.

Example: Preparing financial statements, conducting audits, tax preparation, and planning.


Question: Which of the following best describes book-keeping?

A) Interpreting financial data
B) Recording financial transactions
C) Planning budgets
D) Conducting audits

Answer: B) Recording financial transactions

 Measuring Business Profit and Loss

Purpose:

  • To determine the financial performance of a business over a specific period.
  • To provide information on the business's profitability and sustainability.

Explanation:

  • Profit: Occurs when total revenue exceeds total expenses.
  • Loss: Occurs when total expenses exceed total revenue.

Example: If the total revenue for the year of a business is $200,000 and total expenses are $150,000, the profit is $50,000.


Question: Why is it important to measure business profit and loss?

A) To attract customers
B) To assess financial performance
C) To hire more employees
D) To determine the market share

Answer: B) To assess financial performance

Role of Accounting in Monitoring Progress and Decision-Making

Purpose:

  • Provides a detailed financial picture of the business to stakeholders.
  • Aids in strategic planning and informed decision-making.

Explanation:

  • Monitoring Progress: Regular financial reports help in tracking the business performance against goals and budgets.
  • Decision-Making: Financial data assists managers in making decisions about investments, cost-cutting, and other strategic initiatives.

Example: A business uses monthly financial statements to track its progress and adjust its strategy to improve profitability.

Question: How does accounting help in decision-making?

A) By predicting market trends
B) By providing detailed financial reports
C) By increasing customer satisfaction
D) By enhancing employee morale
Answer: B) By providing detailed financial reports


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    Complete Notes, Topical Exam Questions and Quizzes                  for IGCSE Accounting  1 The fundamentals of accounting 1.1 The purpose of accounting 1.2 The accounting equation   2 Sources and recording of data 2.1 The double entry system of book-keeping 2.2 Business documents 2.3 Books of prime entry   3 Verification of accounting records 3.1 The trial balance 3.2 Correction of errors 3.3 Bank reconciliation 3.4 Control accounts   4 Accounting procedures 4.1 Capital and revenue expenditure and receipts 4.2 Accounting for depreciation and disposal of non-current assets 4.3 Other payables and other receivables 4.4 Irrecoverable debts and provision for doubtful debts 4.5 Valuation of inventory   5 Preparation of financial statements 5.1 Sole traders 5.2 Partnerships 5.3 Limited companies 5.4 Clubs and societies 5.5 Manufacturing accounts 5.6 Incomplete records   6 Analysis and interpretation ...
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