ACTIVITY 5

Activity 5

Activity 5

Activity 5.1

Accounting is a service-based profession that provides reliable and relevant financial information useful in making decisions.

Financial information may include sales, expenses, taxes and other figures.

So, how exactly is this information prepared? There are several steps involved. These steps are identification, recording and communication.

First, economic events are identified. A sale at a gas station, payment of taxes by a commercial enterprise, or purchase of insurance is all examples of economic events.

Second, all economic events are recorded. Recording is done to provide a history of a company's financial activities. In this step economic events are also classified and summarized.

Activity 5.2

There is more than one answer to this. Firstly, the managers of the business will want to know how things are going. They need financial information in order to plan for the future; they then need more up-to-date information in order to check whether actual performance is on target. This process is known as controlling the costs and finances. In accounting it is known as management accounting. So, management accounting is done by the managers, for the managers, for the purposes of planning and control.

Secondly, there are several groups of people who may have an interest in the finances of the business. The law says that they have a legal right to certain information. The whole process of providing this information (and of maintaining a book-keeping system capable providing it) is known as financial accounting.

The interested parties are often referred to as 'stakeholders'. Look at the table below. Which groups of people (or organisations) would be most interested in the information in the right-hand column? (If you get stuck, you can go to a work-sheet on stakeholders to find some answers - write these answers down on a piece of scrap paper, then click the 'back' button on your browser to get back here). If you wish to check, some answers are suggested at the end of this exercise.

Activity 5.3

It's interesting to me that more people ask me for advice about starting a business when the economy is stumbling than when things are humming along.

However, that's not as counter-intuitive as it may at first seem. Getting laid off -- or just the possibility of losing a job -- often causes people to focus on how they might create their own enterprise.

So, I find myself talking a lot about the financial decisions people must make before starting their own businesses. Here are five of the biggest:

1. How long can you live on your savings? This isn't an issue for people who are able to raise enough money for their start-up venture to pay themselves a salary from Day One. But most small-business start-ups include the disturbing feature of declining personal bank balances in the early going. As long as you're looking at your expenses and how long you can live on your savings, you should also figure out now what personal costs you can at least temporarily

Eliminate

It's usually emotionally easier to review your personal budget and tighten expenses when you're contemplating ...