The Main Purpose of Accounting Essay
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Keeping track of transactions and recording revenue and expenses are an important process, often assigned to an accounting department or a financial manager. Accounting allows companies to provide reports and insights needed to make sound financial decisions. The main purpose of accounting is to identify and record all activities of the income and the outcome that will affect the organisation financially. All activities, including purchases, sales, the capital and interest earned from investments are recorded in ledgers or journals. Entrepreneurs have to understand and complete a variety of business functions.
An important business function when starting a business is accounting. Although many entrepreneurs may have to deal with stacks of financial documents but accounting often provides entrepreneurs with the clearest picture of their businesses success. Entrepreneurs must also keep records regarding the business start-up for tax and legal purposes. Filing records like these with great organisation will help run the business more efficiently and responsibly.
Why is it important to keep accurate financial records, and how will this help the entrepreneur? Financial records will become very important when the tax season comes but they are also important in the day to day business. Preparing financial statements such as income statements, balance sheets, and cash flow statements are important because they show how successful the business is, an income statement list revenues and expenses for the business. Accounting how much income is coming in from all channels, it can include accounts receivable, sales, etc. These items are the business revenues. Expenses should be clear because they are everything that is paid out of the business including the operating expenses, the difference between these will be the net income. To help the entrepreneur in the business, financial records should always be up to date so that it can display an accurate snapshot of the business at any time, this way the entrepreneur won’t have to back track, always keeping the business accounting affairs in order.
What is meant by revenue and expenditure? Revenue is for the business. This is the total amount of money received by the business for goods sold or services provided during a certain time period. In terms of reporting revenue in a businesses financial statement, different businesses may consider revenue to be received in different ways. For example, revenue could be received when a deal is signed, when the money is received or when the services are provided. Expenditure is spending money in order to create future benefits, which means that the money is being spent on a fixed asset, or on making sure that an existing asset has its useful life extended beyond the life of the current tax year.
This could be equipment, property or industrial buildings. The difference between capital and revenue expenditure is that capital expenditure results in an addition to an asset to the business, however revenue expenditure results in an addition to the expense account. Capital expenditures are payments for asset additions and replacements. Revenue expenditures benefit a current period and are made for maintaining assets with routine repairs or replacement of a small part. A capital expenditure will benefit two or more accounting periods and expenses for future accounting periods. Revenue expenditure will cause an understatement of net income in that year. When expensing an item, it goes into the expense side of the income records where as capitalising an item will be processed on the total balance sheet.
Revenue income and Capital income
Capital income is money coming in from the owner of the business or outside investors for the business. It is used to buy things that will stay in the business for a long time, for example the business building, vehicles or equipment which is initially referred to assets. Revenue income is money coming in from selling goods and providing a day to day service. The main sources are; sales, rent received or commission received. The types of Capital income to expect to incur are such things as: Loans- The amount of money lent to the business from the bank.
The lump sum the bank offer to give you has to be paid back in lump sums, at certain amounts, per month over the time period given. The bank will add a monthly interest onto the loan which is usually a percent of the amount borrowed. These monthly payments need to be paid back, even if the business does not succeed. Mortgages- Mortgages are similar to loans, but tend to give out longer time periods to pay the lump sum back. To secure the mortgages you will need to put assets on line. This is usually the property you used the mortgage to pay for.
The types of Revenue income to expect to incur are such things as: Sales- Or sales revenue is money coming into the business from the sales of or services. The sales can be paid for cash, which is the more comment payment, be paid by debit card or credit of the store, being paid for later on.
Rent received- A business that owns property and chargers others to use all of or part of the property. The business will receive rent from this inhibitor. Commission received- A business that may sell products or services as a part of another business. For each sale they will make a percentage of what the customer pays for that sale. This percent is called commissions.