1. CIMA define this as follows :
“Management accounting is the
application of the principles of
accounting and financial
management to create,
protect, preserve and increase
value for the stakeholders of
for-profit and not-for-profit
enterprise in the public and
private sectors”.
Management Accounting – 1.1
2. The CIMA definition of book-keeping is:
“Recording of monetary transactions,
appropriately classified, in the
financial records of an entity”
• Book-keeping is an important sub-
branch of financial accounting. In
fact, it can be regarded as the
foundation that the entire discipline
of accounting is built on.
• This is a task involving the collection
of basic financial data. This data is
entered in special records which are
known as ‘books of account’. This is
then extracted in the form of a ‘trial
balance’
Book Keeping – 1.2
3. CIMA defines an audit as
being:
“Systematic examination
of the activities and
status of an entity,
based primarily on
investigation and
analysis of its systems,
control and records”
Auditing– 1.3
4. Auditors are usually trained accountants who carry out this investigation, and specialize in determining whether the
accounts are credible. e.g. whether they are valid.
There are two main types of auditors
1. External auditors
These are appointed by the owners of a firm, and it is their duty to carry out an independent and impartial review of a
company’s accounts. They report directly to the owners and not to the managers of the firm. They report a ‘true
and fair’ view of the firm’s affairs for a certain period of time.
There is a misconception that the auditor’s role is to discover whether any fraud has taken place, however this is
not the case. Auditors are generally selective in their searches and report their findings once satisfied.
2. Internal auditors
Some firms employ internal auditors. These auditors are appointed by the manager. They perform routine tasks ad
undertake checks of the firm’s accounting procedures.
External and internal auditors usually work together very closely. However, their responsibilities and roles differ. Also
external auditors always have to remember that internal auditors are hired by the firm, and thus may be subject to
pressures of promotions, salary increases which could sway their impartiality.
Auditing 1.3
5. Taxation is a highly complex and technical branch of
accounting. It is a tax accountant’s responsibility to
compute the amount of tax payable by both
businesses and individuals. It is only necessary for
any entity to pay the minimum amount of tax that
they are legally required to.
This means that it is perfectly legal for firms to instruct
their accountant to search all legal means to
minimize the amount of tax that might be
demanded by the government. This is known as ‘tax
avoidance’.
This is completely different from the non declaration of
income on which tax might be payable, known as
‘tax evasion’. Tax evasion is a very serious crime and
can lean to a long prison sentence.
There is a thin line between tax avoidance and tax
evasion and a competent tax accountant must steer
this fine line very carefully.
Taxation 1.4
6. Corporation tax is based on
the accounting profit for the
year. In order to calculate
the amount of tax payable
for the year, the accounting
profit is adjusted for those
items that are not allowable
against tax, e.g.
depreciation.
There are also
Taxation
7. Insolvency is a highly specialised area of
accounting. Liquidation and bankruptcy fall
under this umbrella, however it is an area
that many accountants will never encounter.
There is a misconception surrounding bankruptcy.
Bankruptcy is a legal procedure, applied to
individuals when their financial affairs are
deemed so serious that they required a form
of legal protection from their creditors
(entity’s who they owe money to).
The term liquidation is usually applied to a
company when it also gets into serious
financial difficulties and its affairs have to be
‘wound up’. This is where arrangements are
made for it to cease existence in an orderly
fashion.
Liquidation and Bankruptcy
8. End of Unit 1
We hope you enjoyed this unit. Complete the
following Quiz to test your learning
End Of Unit 1
