ACCT105 BUSINESS ACCOUNTANCY

MODULE 2
FORMS OF BUSINESS FIRMS

Accounting & Reporting System- Control

and Compliance

Understanding the relationship

between Accounting & other Business
Functions

Most of the worlds work is done through

organisations.
Organisations can be classified largely as
`profit or `non-profit.
They consists of a group of people who work
together to accomplish several objectives

organization uses various resources.

Resources can be financial and non financial.

Financial resources - money, capital or finance either

brought into the business by the owners(s) or borrowed
money from other people or financial institutions.

Non-financial resources - land, labor, capital and

entrepreneurship.

These resources have to be paid for and people in the

organization need information about the amounts of
these resources, and how to finance them and the
results achieved through using them
3

External stakeholders also need similar

information to make judgements about the
organization.

Accounting is a system that provides such

information.

Profit firms do business to - make a profit.

Non-profit firms are into governing, providing
social services, education and health services.

Accounting is basically similar in both types of

organisations.
4

The need forinformation.

Information needs of most organisations are

similar.

Information is processed data used by various

stakeholders to make decisions.

Information can be non-quantitative and

quantitative.

Examples of non-quantitative information would be

the types of new products available for sale,
customer reaction to a particular type of service
offered by a department
5

Examples of Quantitative information the monthly

sales report of a sales department, total wages and
salaries paid to the sales employees in the sales
department, number of items purchased by the
purchasing department.

Accounting uses several types of quantitative

information.

Accounting information is distinguished from the

other types since its usually expressed in monetary
terms.
Example of monetary information in accounting
Sales Rs20lacs, Loan Rs100crores, Wages and
salaries Rs25lacs.

Other business functions - include hiring of

employees (HR Dept),
buying goods in large amount for
resale(Purchase (Procurement) Dept),
selling goods to customers for cash and on
account (Sales Dept),
looking after customer complaints and welfare
(Customer Services Dept),
promotion and display of products (Marketing
Dept),
new product innovation, research and
development(Research & Development Dept).

In all these department accounting information is

derived in quantitative terms after which various
financial reports are prepared for respective
stakeholders.

HR Dept would have 200 employees and the total

wages and salaries bill for a month could be
Rs15lacs, - this amount is information used by the
accounting dept.

Sales Dept would provide the amount of cash and

credit sales for a month and this could be
Rs120lacs, and this information is also useful for
the accounts dept
8

Purchases Dept would show their monthly

purchases were Rs75lacs and this information is
also very useful to the accounting dept.

Marketing Dept would include their monthly

spending included Rs19 lacs which would also
be useful for the accounting dept.

So financial information from each of these

departments is used by the accounting Dept to
prepare financial reports such as Profit and Loss
account and Balance Sheet.

Financial issues associated with planning, production, marketing, and procurement and information technology

A considerable amount of operating information is

required to conduct an organisations day-to-day
activities.

Lets take an example of a make believe automobile

company: Garbar Motors.
This company produces fast and furious vehicles.
These are preferred by university students, sports
and film stars and those who can afford this type of
vehicle.

10

So Garbar motors employees must be paid wages

and salaries and the government requires that
records be maintained for each employee showing
amounts earned, paid, taxes deducted.

accounts department - keeps record of amount of

salaries and wages paid, taxes deducted and paid to
govt, various deductions made to other
organisations.

Sales dept prepares sals reports - which automobiles

are available for sale and each ones cost and selling
price, number of vehicles sold, number of older
models exchanged for newer models.

11

So sales records must be forwarded to the

accounts dept.

The person in the stock room knows which parts

and accessories are on hand and if any part
become old or outdated replacement parts may
be needed for which the accounts dept also
needs to know if purchases need to be paid for.

Amounts owed by the customers to the

automobile company must also be known so if
customers dont pay on time the appropriate
action can be taken.
12

The accounts dept. also needs to know what

the firm owes to outsiders and how this amount
would be paid and how much money it has in
the bank.

Budgets have to be prepared by the production

dept to decide how much vehicles it must buy
or produce in its factory, sales dept. needs to
know how many orders have been received,
marketing dept needs to know how much they
should spend on promotion and marketing in
launching new vehicles and whom they should
hire as models, film stars/sports stars.
13

So based on the budet projections of each

department, the accounts dept also plans in
order to decide whether the respective dept
can go ahead with their targets or they should
make some cuts.

The use of information technology also helps

in making comparisons of previous years
actual data with the current projections and
various simulation exercises can be done by
managers to decide whether their projections
are accurate.

14

Accounting and finance

functions within business
Financial Accounting, Financial
Management, Cost
Accounting, Management
Accounting, Taxation,
Auditing, Green Accounting,
Social Accounting

15

Financial accounting information

Intended for managers and also for the use of
external stakeholders to the business firm.
Involves the preparation of financial statements
such as Trading account, profit and loss account
and balance sheet.
Shows Net profit or Net Loss from operating a
business.
Also provides details of what are owned by the
firm, whom it owes money and finally the owners
share in the business

16

Garbar Motors for example would need to

know how much sales it achieved, what were
its Total Revenues from other sources, the
Total Expenses and finally whether the firm
made a Net Profit or a Net Loss.

The Trading account indicates how well a firm

had traded whereas the profit and loss
account indicates how much revenues have
been earned and the various expenses made
by the firm in earning these revenues.

17

Additionally, the balance sheet of this firm

would indicate what assets were owned and
financed by the firm and also through external
sources, how much money was owed to
outsiders and what was the owners share in
the business.
if the firm needed additional funding, then
external stakeholders such as shareholders,
creditors and banks would need to look at the
profit and loss account and especially the
balance sheet while assessing the firms
ability to be given additional funds.

18

19

20