Sample Cheat Sheet: The Purpose of Accounting
Cheat Sheet: 1.1 The Purpose of Accounting
O Level and IGCSE Accounting Quick Revision
Book-keeping vs. Accounting
| Feature | Book-keeping | Accounting |
|---|---|---|
| Definition | Recording day-to-day transactions | Interpreting, classifying, summarising and communicating financial data |
| Main Focus | Accurate recording of financial events | Decision-making based on financial records |
| Responsibility | Book-keeper | Accountant |
| Examples | Recording a sale, entering data into ledger | Preparing financial statements, budgeting |
| Business Role | Foundation of all financial records | Ensures reports are available for planning, analysis, and control |
Note: Book-keeping is a sub-process within the broader field of accounting.
Purposes of Measuring Profit and Loss
| Purpose | Explanation |
|---|---|
| To measure business performance | Indicates whether the business is profitable or making losses |
| To assist in decision-making | Profitability helps determine growth plans, cost control, and investment |
| For legal and tax purposes | Required to calculate taxes due and ensure compliance |
| To report to stakeholders | Owners, investors, and banks use profit/loss figures to evaluate the business |
| To compare over time or with others | Profit/loss trends reveal improvement or decline in business health |
Key Formula:
Profit = Income − Expenses
Example:
- Revenue = $50,000
- Expenses = $35,000
- Profit = $50,000 − $35,000 = $15,000
Role of Accounting in Monitoring and Decision-Making
| Role | Example |
|---|---|
| Monitoring business progress | Monthly income statements track whether goals are being met |
| Identifying trends | Cost increases or falling revenues spotted early |
| Supporting decisions | Whether to expand, cut costs, increase prices, change product lines |
| Loan/investment justification | Accurate accounts needed by banks and investors |
| Ensuring compliance | Required by law for tax and legal reporting |
Quick Key Terms Summary
| Term | Explanation |
|---|---|
| Revenue (Income) | Earnings from main business activities (e.g. sales) |
| Expenses | Costs incurred in business operations |
| Profit | Surplus of income over expenses |
| Loss | Excess of expenses over income |
| Financial Period | A set time frame for preparing financial statements |
| Stakeholders | Individuals or groups interested in financial information (e.g. owners, banks) |
Case Example for Exam Recall
Business: Awais runs a car repair shop
- Monthly Revenue: $20,000
- Monthly Expenses: $17,500
- Monthly Profit: $2,500
- Last Year Monthly Profit: $4,000
- Conclusion: Profit has decreased → review expenses and customer demand