Unit 5 Introduction to Accounting

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Name: Shannon Somford

Class: 2D

Unit: Unit 5 Introduction to Accounting

First Date: Friday 13-03-2009

List of contents

Activity 1

P1                                                                                Page                

Activity 1

P2                                                                                Page                

Activity 2

P3                                                                                Page                

Activity 2

M1                                                                                Page                

Activity 2

D1                                                                                Page                

Activity 3

P4                                                                                Page                

Activity 4

P5                                                                                Page                

Activity 4

M2                                                                                Page                

Activity 4

D2                                                                                Page                

Activity 1;

This activity covers the requirements for the P1 and P2 grading criteria.

  • P1. Describe the purpose of accounting.

The main purpose of accounting is to give information that is needed in the process of economic decision-making that will help to create sound and feasible decision. It focuses on the process of preparing different financial reports that will show the information regarding the performance of the company or organization to the external parties or stakeholders that are involved with the company or organization such as investors, creditors, tax authorities etc. On the other hand, the management accounting focuses on the different issues that are related and important to the overall internal process of decision making. Furthermore, the two is also different in terms of the influence of the impact of the standard setting bodies in the decision making process or regarding their creation of laws and regulations. The financial accounting is being affected greatly by the different organizations and authorities in different countries, while the management accounting varies from different perspective of different organizations and companies.

The accounting process of different companies and organization in the world is considered as one of the most important factors, due to the fact that it enables them to see as well as control the financial flow inside and outside of their business or organization. It is also important to the different stakeholders of that organization, in order for them to know the current financial situation of the entire establishments. Because of the different factors such as technology and globalization, the process of accounting is facing different dilemmas and changes. Due to the said factors, internationalization of accounting standards is considered as a significant and essential part of the rapidly globalization economy.

Recording transactions

Accurate records are essential. If documents are lost of the business, the business could forget to demand payment for some jobs that already are done or another problem could be the payment of bills. These problems must be avoided at all costs because it could lead to bankruptcy.  

Monitoring activity and controlling the business

Sound record keeping allows managers to keep track of orders, sales and bills. So this means that they could have a good idea of how well the company is doing.

Helping the management of the business

Well prepared accounting statements will inform planning decisions and allows the directors and managers to monitor the progress of the company and to keep better control over its activities.

Measure the financial performance of the business

Getting on top of financial measures of your performance is an important part of running a growing business.

It will be much easier to invest and manage for growth if you understand how to drill into your management accounts to find out what's working for your business and to identify possible opportunities for future expansion.

Measuring your profitability

Most growing businesses ultimately target increased profits, so it's important to know how to measure profitability. The key standard measures are:

  • Gross profit margin - this measures how much money is made after direct costs of sales have been taken into account, or the contribution as it is also known.
  • Operating margin - the operating margin lies between the gross and net measures of profitability. Overheads are taken into account, but interest and tax payments are not. For this reason, it is also known as the EBIT (earnings before interest and taxes) margin.
  • Net profit margin - this is a much narrower measure of profits, as it takes all costs into account, not just direct ones. So all overheads, as well as interest and tax payments, are included in the profit calculation.
  • Return on capital employed (ROCE) - this calculates net profit as a percentage of the total capital employed in a business. This allows you to see how well the money invested in your business is performing compared to other investments you could make with it, like putting it in the bank.

Other key accounting ratios

There are a number of other commonly used accounting ratios that provide useful measures of business performance. These include:

  • liquidity ratios, which tell you about your ability to meet your short-term financial obligations
  • efficiency ratios, which tell you how well you are using your business assets
  • financial leverage or gearing ratios, which tell you how sustainable your exposure to long-term debt is


Bear in mind that even though you are likely to use an increasing number of financial measures as your business grows, one of the most familiar cashflow remains of fundamental importance.

Cashflow can be a particular concern for growing businesses, as the process of expansion can burn up financial resources more quickly than profits are able to replace them.

Capital income

Capital income is the money that is used to set up a business. This money can be sourced from any where such as the before stated. Capital income is most commonly used for acquiring fixed assets, however this money is not used for the constant replacement of equipment or furniture.

Sole traders

A sole trader is a business that is owned by one person. It may have one or more employees. It is the most common form of ownership.

The main advantages of setting up as a sole trader are:

  • Total control of the business by the owner.
  • Cheap and easy to start up – few forms to fill in and to start trading the sole trader does not need to employ any specialist services, other than setting up a bank account and informing the tax offices.
  • Keep all the profit – as the owner, all the profit belongs to the sole trader.
  • Business affairs are private – competitors cannot see what you are earning, so will know less about how the business works and how it succeeds.
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The reasons why sole traders are often successful are:

  • Can offer specialist services to customers – appliance repair specialists.
  • Can be sensitive to the needs of customers – since they are closer to the customer and will react more quickly, because they are the decision makers too.
  • Can cater for the needs of local people – a small business in a local area can build up a following in the community due to trust, if people can see the owner they feel more comfortable than if the owner is in some far off town, not able to hear ...

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