The language of business
Often referred to as the language of business; accounting is more a means of keeping score in a common format.
Accounting involves recording business transactions in financial terms and reporting that information to business owners and other interested parties.
Business transactions such as:
- Making a sale
- Buying goods and services
- Paying Staff
- Borrowing money
- Paying loans back
- Investing in assets (machinery, buildings, vehicles etc)
- Paying tax
are described in accounting for the impact that they have and evaluated to a common base known as money.
By common agreement in the UK we accept that the money base is £ sterling (it could be any other unit of measure if we all agreed and recognised it).
The business score in accounting is usually presented in three documents, each in a particular format and showing financial information of different significance:
Accounts are widely used by many groups and for many reasons; you may be able to add to these lists.
Users of accounts
- Owners / Shareholders – to value their investments
- Managers – assist in control and decision making
- HM Revenue & Customs – agreeing tax liability
- HM Revenue & Customs – agreeing VAT liability
- Central statistical office – official statistics
- Investors – to oversee and/or value their investments
- Banks – to oversee and/or value their investments and loans
- Customers – can I rely on my supplier?
- Suppliers – will I be paid?
- Auditors – the figures to be audited
- General public / Journalists – public interest issues
- Trades Unions – negotiations / industry data
- Employees – information on what is happening to the business they work for?
- Potential employees – safe to work for?
- Pension funds / Fund managers – for potential investment
- Lobby Groups – to review and further their issues
- Authors of books on the subject – for materials and examples
Uses of accounts
- Showing the financial situation of the entity
- Demonstration of compliance to the law
- Reporting performance
- Managing performance
- Valuing an entity
- Demonstrating resources available
- Demonstrating capacity to do things
- Comparisons and benchmarking
- Support for raising finance
- Demonstration of probity
- Supporting tax computations
- Keeping investors (including banks) and potential investors informed
Are you a small business or charity? Discover why you need a budget to thrive and make lasting change. Learn the essentials now!
Charities with a gross income below £250,000 and who are not registered as a company have the option of preparing receipts and payments accounts, as long as their governing document does not require their charity's annual accounts to be prepared as accruals accounts.
Employee cost allocation is the process of distributing staff costs across various aspects of a business. This helps in understanding how employees are used in different projects, allowing for accurate budgeting, enabling full costing for projects and better management control.