Lesson 2: Intro to Finacial Accounting

Identify the two sectors within the UK economy and explain the primary
objective of each of the sectors

Identify common types of business entity which operate in the private
sector and explain how such entities are organised in terms of ownership
Explain the two main functions of accounting i.e. ‘financial accounting’
and ‘management accounting’

Identify the types of system used by small, medium and large sized
business organisations as the basis of recording financial information
 Identify the types of information that a system for recording financial
information is designed to provide

Identify sources of data from which business transactions are processed
and know the period of time for which source documents must be kept on
file

Explain the need for confidentiality and security in the keeping of financial
records and preparing financial statements

Explain systems commonly used for filing and storing financial
information

Identify the financial statements prepared from financial records

Introduction
The UK economy is made up of two sectors i.e. the public sector and the
private sector.
The public sector is the part of the economy owned, financed and controlled
by the state through central government and local authorities. In the public
sector the main objectives relate to the provision of services which benefit
society as a whole, which are affordable or free at the point of use, and which
promote and encourage equal opportunity.
The private sector is the part of the economy where business activity is
organised by private individuals operating on their own or in groups. The main
objective of those operating in the private sector is profit. Goods and services
are supplied to meet the demands of those who have the ability to pay. Whilst
you may find yourself working in an organisation which operates in either the
public sector or private sector, the current AAT qualification concentrates on
accounting for private sector organisations.
The types of business organisations, commonly referred to as ‘business
entities’, operating in the private sector include:
- Sole traders
- Partnerships
- Limited companies (private and public)
Sole trader
This is the simplest form of business entity and the term sole trader is used to
describe a business entity owned by one person.
This type of entity is an unincorporated business which means that ‘in the
eyes of the law’ there is no distinction made between the business and its
owner. As a result the owner is personally responsible for any action or
inaction of the business. The sole trader has unlimited liability and is
personally responsible for all debts of the business, therefore the trader’s
private wealth, as well as funds invested in the business, are at stake. Should
the business become insolvent the trader may need to sell off personal
possessions to meet the debts of the business.
There is very little restriction or regulation on the financial records kept for a
sole trader type entity or on the preparation or presentation of financial
statements on behalf of such entities.
Partnership
A partnership is a business entity…