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Accounting for the non accountant - unit 1

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unit 1

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Accounting for the non accountant - unit 1

  1. 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. 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. 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. 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. 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. 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. 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. 8. End of Unit 1 We hope you enjoyed this unit. Complete the following Quiz to test your learning End Of Unit 1