Summary of Week 1
Bookkeeping is the process of recording financial transactions and financial events in a systematic way. Accounting is broader than bookkeeping and refers to the process of classifying, summarising, presenting and interpreting bookkeeping records. Users of financial information want answers to the following four fundamental financial questions:
Question 1: What does an enterprise own i.e. what are its assets?
Question 2: What does an enterprise owe i.e. what are its liabilities?
Question 3: How did the enterprise perform i.e. what is its profit or loss?
Question 4: How did the enterprise obtain and use cash i.e. what is its cash flow?
The principal financial statement that summarises the information contained in the accounting records is the balance sheet or statement of financial position. Every business also needs to keep track of its profit or loss and its cash inflows and outflows. Because of credit sales and purchases, a business can make a profit in an accounting period, normally a year, even though it loses cash in the same period.
A good system of financial record keeping allows all the information contained about an enterprise’s capital, assets (including cash), liabilities and profit or loss to be traced back, quickly and accurately, to original transactions and financial events.
The same system can be used for the purposes of financial and management accounting.
You can now go to Week 2: Essential numerical skills for accounting.