What is accounting? Accounting is the process of identifying, recording, summarizing and communicating financial information to interested parties so that inform judgments and decisions can be made. The Purpose of Accounting: 1) It provides reports on the financial position of an organization and the profitability of its operations. 2) It helps management to make effective and efficient decisions in terms of control and directing of business activities. 3) It provides a way to measure the effectiveness and performance of an organization over a particular period of time. ) It provides economic information to interested parties so they can make informed and reliable decisions. 5) It provides a record of assets owned, accounts owed to others and monies invested into an organization and so on. The Users of Accounting Information: The users of accounting information can be classified under to broad headings.
They are; 1) Internal Users 2) External Users Internal Users – are parties within the organization who are interested in the accounting information. Some examples of internal users and why they will need the information ) The manager of the business – needs accounting information to assist them in decision-making, controlling and directing the day-to-day course of the business that help them put together policies and plans for the business’s future. b) Owners of the business - needs accounting information to see whether or not the business is profitable and also to have an idea on what the financial resources of the business are. c) Employees – use accounting information to determine a company’s profitability and profit sharing (bonus). External users – are parties outside the organization who are interested in a company’s accounting information.
Some examples of External users and their need the information a) Investors –to know whether or not they should make an investment into a company so they can be better able to buy or sell shares or make other decisions relating to shares, bonds, etc. b) Creditors – who utilize accounting information to make lending decisions. E. g. Suppliers and Banks c) Tax inspectors – who need accounting information to determine a company’s tax liabilities. E. g. Government Revenue officers. d) Customers – who may need accounting information to decide which products to buy from which companies. Types of Liabilities 1. Limited Liability
Persons that have this type of liability are only liable for the debt incurred by the company. Personal possessions would not be sold to cover any outstanding expense in the case of bankruptcy. 2. Unlimited Liability Persons that have this type of liability are solely responsible for all debt incurred by the business in any event that the business goes bankrupt. Personal possessions can be sold to cover any outstanding expenses. Types of business organization 1) Sole trader – This is a business owned by one individual who provides the capital for the operation of the business as well as directs and supervises all the business activities.
This owner has unlimited liability. E. g. 2) Partnership – This occurs when two or more persons (up to 20) carry on a business together with the common objective to make profits. They both provide capital and are involved in the supervising of the activities of the business. They are govern by the Partnership Act. Each Partners (except in the case where there are one or more persons who has limited liabilities) has unlimited liabilities. E. g. 3) Corporations (Limited Liability (Ltd. )) / Companies – This is a company that is formed by the coming together of shareholders or owners.
It is separate and distinct from its shareholders. Therefore, it can enter into contracts and can sue or be sued. The company is responsible for all it’s debts. The shareholders possess limited liability and are responsible for providing the capital through shares and debentures. The company is managed by a board of directors and also by hired managers. E. g. 4) Cooperative - This is an association of persons who have voluntarily joined together to achieve a common objective through the formation of a democratically controlled organization.
They make equitable contribution to the capital required and accept a fair share of risks and benefits of undertaking in which members actively participate. E. g. 5) Non – Profit Organizations- These are organizations that operate with the main objective of providing a service or other charitable assistance to the public. It is not geared towards making profits but uses its funds to maintain, improve and or expand its operation. E. g. Assignment : List one example of each type of Business Organization. Also come up with at least one area where you think accounting is used.