Accounting Processes and Users

• The four processes of accounting are collecting, processing, presenting and analysing.

Internal Users

• Internal users are people inside the business that use accounting reports.
• Examples of internal users are owners, management, and the board of directors.

External Users

• External users are outside the business but use accounting reports for credit checks and to assess business performance.
• Examples of external users are shareholders, lenders, Inland Revenue Department (IRD), suppliers, creditors, employees, customers, and analysts.

Statement of Financial Performance

• A statement of financial performance reports on revenues and expenses.
• It shows how well the business performed over the last period.

Financial Position

• Financial position identifies what a business owns and owes.
• It reflects how the owns and owes have been invested or used.

Cash Flow

• Cash flow shows the movement of cash in and out for the period ending.
• The different types of cash flows are operating activities, investing activities, and financing activities.

Elements in Accounting

• The different types of elements in accounting include assets, liabilities, equity, revenue, and expenses.

Assets

• An asset is the result of a past transaction.
• It is currently owned or controlled by the business.
• It will provide future inflows of economic benefits.

Current Assets

• Current assets include cash and equivalents, short-term investments, accounts receivable, and inventory.

Non-Current Assets

• Non-current assets are resources a business owns and plans to hold for more than a year to be turned into cash.

Liabilities

• Liabilities represent a current duty or responsibilities that the business must fulfill.
• This present obligation arises from past transactions or agreements such as loans, contracts, or purchases.
• These are due to be settled within twelve months after the balance sheet day.

Current Liabilities

• Current liabilities will be settled within twelve months after the balance sheet day.

Non-Current Liabilities

• Non-current liabilities will be settled after the accounting period (after twelve months of balance sheet date).

Owner's Equity

• Owner's equity is the residual difference between assets and liabilities.
• It represents the contributions made by the owners of the business.
• Owner's Equity (OE) is calculated as Assets (A) + Liabilities (L)

Share Capital

• Share capital represents the total amount invested in the entity by the owners.

Drawings

• Drawings are the withdrawal of goods and cash from the business by the owner for personal use. This applies to sole traders and partnerships.

Dividends

• Dividends are the distribution of earnings to the owners or shareholders.

Income

• Income includes both revenue and gains with revenue arising in the ordinary course of entity activities (also known as income).

Revenue

• Revenue is money (inflows) gained in exchange for goods or services.
• This results in an increase in economic benefits that either increase assets or decrease liabilities.

Expenses

• Expenses are ongoing costs incurred by running the business.
• This causes a decrease in economic benefits, which either decreases assets or increases liabilities.

Sole Trader

• A sole trader is an owner-operator who owns the business.
• This is usually a small service, retail store, or part-time business and may employ staff/contractors.

Advantages of a Sole Trader

• Low start-up costs
• Greatest freedom from regulation
• Owner in direct control
• Minimal working capital requirements
• All profits go to the owner

Disadvantages of a Sole Trader

• Unlimited liability
• Difficult to raise capital
• Management responsibility

Partnership

• A partnership includes two or more people carrying on a business with a view to profit

Disadvantages of a Partnership

• Unlimited liability
• Divided authority
• Lack of continuity
• Sharing of profits

Advantages of a Partnership

• Ease of formation
• Additional sources of finance
• Broader management base
• Limited outside regulations
• Partnerships are not taxed.

Companies

• Ownership is held by shareholders.
• A company is a separate legal entity, distinct from the shareholders, with limited liability.
• Profits are distributed as dividends to each shareholder.
• Run by a board and a CEO.
• Public companies can be bought by anyone.

Advantages of Companies

• Owners have limited liability because a company has a separate legal status.
• Liability is limited to the amount of the owner's investment.
• Ease of change in ownership and perpetual existence of the entity gives stability.
• Potential greater access to funds through share distribution.

Disadvantages of Companies

• Stricter regulatory requirements.
• Greater setup costs.

Business Ownership

• Capital
• Drawings
• Profit (revenue-expenses)

Owner's Equity Equation

• Owner's Equity (OE) = Capital (C) + (Revenue (R) - Expenses (E))