2.1 Accounting records and financial statements
Accounting records store information about all the financial transactions and events of a business. A small business may only have a few financial transactions a day to record while a large, multinational business may have many thousands.
Information point
This course focuses on business organisations but the core concepts and principles of bookkeeping also apply to non-profit organisations.
Why do all businesses need to keep accounting records?
- They keep track of where money comes from and how it is spent.
- They are required by law.
- They help to keep control of goods and property owned by a business.
- They are used as the basis for financial statements.
What are financial statements?
Financial statements are summaries of accounting records that are drawn up to satisfy the information needs of owners and other stakeholders in the business. These stakeholders are presented with the financial records in the form of two main financial summaries or statements. The first of these is a balance sheet which shows the financial state of affairs of a business at a specific date; the second is a profit and loss account which records the income and expenditure of a business for a period of time.
Who are the typical stakeholders of a business and what information do they need?
| Stakeholders | Information needs |
|---|---|
| Owners | Owners, whether they own all or part of a business, want information on the risk and return of their investment in a business. |
| Managers | Managers need to have reliable financial information on which to base their decisions. |
| Lenders | Lenders and potential lenders need to have information about the ability of the firm to repay loans and to pay interest. |
| Suppliers | Suppliers, if they give credit to the business, want to know if they will be paid. |
| Employees | Employees are particularly interested in the ability of the firm to pay wages and pensions. |
| Customers | Customers, especially if they are dependent on a supplier, need to know if the business will continue to exist. |
| Governments and their agencies | Reliable financial information from businesses is used as the basis for taxation. In some countries it is also used to compile information about the economy. |
| The public | Financial statements often include information relevant to the public interest, such as environmental information or policies on employment of disabled people, etc. |
The biggest businesses have the most stakeholders. Whatever the size of the business, active and responsible stakeholders will always be interested in how a business, in which they have an informed interest, is financed, and how this finance is used to run the business.