Luca Pacioli, a Venetian mathematician was the first to describe in print the double entry system used by Venetian merchants to record transactions. Click picture for more information.

Recording transations – double entry and the accounting system

Last week we looked at business transactions and how they affected the assets, liabilities and capital of a business. Businesses need a system for recording transactions as they occur. That system is based on double entry bookkeeping. Bookkeeping and the accounting system are introduced in this section.

Link to learning materials (pdf notes)

Financial reporting and decision making

The objective of financial reporting is to present information to users. Users include owners, creditors and other external users.

Users use this information to make decisions. Decisions can be:

a) stewardship decisions, e.g. is the business being run well, is everything above board, and are there systems in place to make sure that all money and transactions are properly recorded and accounted for, and

b) economic decisions, e.g. how well has the business performed, and what are its prospects.

The end result of financial reporting is three principal financial statements:

• The cash flow statement – basically a summary of the entity’s cash and bank accounts for a reporting period (usually a year)
• The statement of financial position [or balance sheet] –  a summary of the assets, liabilities and equity of the business as at the end of the period.
• The income statement [or profit and loss account] – a performance statement summarising income, expenses and profit for the period.

We will look at the fundamental structure of these statements today. A lot of concepts will be covered, and we will need to cover things quite fast to get through everything. We’ll have a look at Tesco’s latest financial statements. At this stage focus on the ‘big picture’ and don’t get bogged down in the detail.

Link to learning materials (pdf notes)