Why do we prepare accounts?
If you invest in a business (whether by buying shares in a company or by putting money into your own business), you need to know how well or badly that business is doing.
In particular you need to be updated periodically with answers to two equally important questions:
a)
Is the business making a profit?
b)
Has it got enough funds to pay its debts?
Accounts are the means by which these questions are answered.
1.2
Form of accounts
A set of accounts consists of two principal statements, usually amplified by detailed notes.
These statements are:
(a)
the statement of financial position: a statement of the financial position of a business at a given date;
(b)
the income statement: a summary of the results of a business’s transactions for a period ending on the date of the statement of financial position. The amount of detail in a set of accounts will vary according to the type of accounts and the people who will be using them. But the same principles will still apply.
1.3
Types of business
There are 3 types of businesses which we will consider in Accounting and a brief description of these types of business is given below. What is important to remember is that regardless of the type of business we are looking at, all businesses will produce an Income Statement and a Statement of Financial
Position periodically (usually annually).
Sole Trader
A sole trader is usually a small business, such as a plumber or plasterer, the owner and the ‘manager’ are the same person.
2
The sole trader is legally responsible for all of the losses that their business makes. Sole traders produce accounts which are not heavily regulated. The sole trader will usually employ a firm of accountants to prepare the business’s accounts.
Partnership
This is a business owned and managed by two or more people examples of such are Accountancy and Law firms. Each Partner in this business is a sole trader for accounting purposes and a Partnership is a collection of sole traders acting together in one business.
Partnerships produce special Partnership accounts.
Company
A company is not owned by the managers of the business (the directors) but instead is owned by Shareholders who buy shares in the company and who elect the Directors to run the company.
A company has limited liability which means that unlike a sole trader, the owners (i.e. the shareholders) are not responsible for the losses of the company. The company is its own legal entity.
Companies must produce company accounts and these are heavily regulated by Company Law and Accounting Standards.
1.4
The purpose of bookkeeping
If accounts are to be produced periodically, the transactions which are being
