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What accounting is for
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Every business needs to know how much it has, how much it owes and whether it is making a profit. Accounting answers those questions, and it has its own vocabulary.
Bookkeeping and accounting
Accounting uses those records to prepare financial statements (such as the income statement and the statement of financial position) and to judge how well the business is doing.
The key words
Profit
If expenses are bigger than income, the business makes a loss.
Owners, banks, suppliers and the tax authorities all want to see the profit figure, so it must be accurate.
A sole trader owns a van worth £8 000 and owes the bank £3 000. Which is an asset and which is a liability?
- The van is owned by the business.
- The bank loan is owed by the business.
Answer: The van is an asset; the bank loan is a liability
Bookkeeping records transactions; accounting prepares and interprets financial statements. Assets are owned, liabilities are owed, capital is the owner's investment, income is earned, expenses are costs, drawings are taken out by the owner. Profit = income − expenses.
The interactive lesson includes the diagrams for this topic.
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