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Accounting for Managers: Interpreting Accounting Information for Decision Making, 4th Edition by Paul M. Collier

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Chapter 3

Recording Financial Transactions and the Principles of Accounting

In order to understand the accounting process, we need to understand how accounting captures information that is subsequently used for producing financial statements and for managerial planning, decision making and control purposes. This chapter describes how business events are recorded as transactions into an accounting system using the double-entry method that is the foundation of accounting. The elements of the accounting system are introduced: assets; liabilities; income; expenses and equity. We introduce a simple form of the Income Statement and Statement of Financial Position (Balance Sheet) and explain the basic principles of accounting that underlie how financial statements are produced. Finally, the chapter introduces one of the first limitations of accounting systems – the calculation of ‘cost’ for decision making, and how cost may be interpreted in multiple ways.

Business events, transactions and the accounting system

Businesses exist to make a profit. They do this by producing goods and services and selling those goods and services at a price that covers their cost. Conducting business involves a number of business events such as buying equipment, purchasing goods and services, paying expenses, making sales, distributing goods and services etc. In accounting terms, each of these business events is a transaction. A transaction is the financial description of each business event.

It is important ...

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