Accounting for Managers: Interpreting accounting information for decision-making

26 ACCOUNTING FOR MANAGERS

system.Accountscan be considered as ‘buckets’ within the accounting system
containing similar transactions.
There are four types of accounts:

žAssets: things the businessowns.
žLiabilities: debts the businessowes.
žIncome:therevenuegenerated from thesaleof goods or services.
žExpenses:thecostsincurred inproducingthe goods and services.

The main difference between these categories is that business profit is calculated as

profit=income−expenses

while the capital of the business (the owner’s investment) is calculated as

capital=assets−liabilities

Financial reports – the Profit and Loss account and Balance Sheet (see Chap-
ter 6) – are produced from the information in the accounts in the accounting
system. Figure 3.1 shows the process of recording and reporting transactions in an
accounting system.

Business is conducted through a series of Business events

which are described in financial terms as Transactions

and recorded on

that are recorded in an Accounting system

comprising a series of Accounts

of which there are four types

Assets Liabilities Income Expenses

which determine the

Capital of the business Profit of the business

and which are

presented in

financial reports

Balance Sheet Profit and Loss account

Source documents

Figure 3.1 Business events, transactions and the accounting system