CHAPTER 21 – INTRODUCTION TO ACCOUNTS Some of the reasons for preparing accounts are:
• To know how much money the business has at a given time. • To know how much money is owed to the business.
• To know how much money the business owes to others (e.g. financial institutions or suppliers).
• To know the value of the business’s assets. • To know if the business has made a profit or a loss. • To assist the business in making important decisions (e.g. if there is a need to borrow). • To fulfil the law that requires limited companies (private and public) to keep accounts. • To keep up to date with tax returns to Revenue.
The person in a business who has the job of recording financial information is called an accountant or financial controller.
Accounting, also known as bookkeeping, is how financial information is recorded in a logical and accurate way.
Reasons for preparing accounts A
Go to page 135 of your Activities and Accounts Book to record the reasons why it is important for a business to keep accounts.
TYPES OF ACCOUNTS There are three general categories of accounts:
1. Personal accounts record details of those who owe a business money (debtors) and those the business owes money to (creditors). For example, if John Smith Ltd sold goods on credit to O’Reilly Ltd for €35,000, John Smith Ltd would record this transaction in a personal account.
2. Real accounts record the material assets of a business. This account does not close at the end of the accounting period and the closing balance is carried over to become the opening balance for the next accounting period. For example, equipment purchased for €10,000 cash would be recorded in a real account.
3. Nominal accounts record revenues, expenses, gains and losses. The balance in a nominal account is closed at the end of the accounting period.
STEPS IN ACCOUNTING Accounts can be divided into four main types:
1. Books of first entry 2. Ledgers 3. Trial balance 4. Final accounts.
Each of these accounts represents a different step in the accounting process.
