Chapter 2

The accounting background

‘Living up to his reputation, he brooks no nonsense, adds no frills. A murmured thank you to the chair, then: “Let us never forget that we are all of us in business for one thing only. To make a profit.” The hush breaks, the apprehension goes. Audibly, feet slide forward and chairs ease back. Orthodoxy has been established. The incantation has been spoken. No one is going to be forced to query the framework of his world, to face the terrible question, why?’

Graham Cleverly, Managers and Magic (1971), Longman, pp. 25–6.


Learning Outcomes

After completing this chapter you should be able to:

  • Explain the nature of financial accounting.
  • Appreciate the basic language of accounting.
  • Identify the major accounting conventions and concepts.

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Chapter Summary

  • Financial accounting is about providing users with financial information so that they can make decisions.
  • Key accounting terminology includes income, expenses, equity or capital, assets and liabilities.
  • The three major financial statements are the income statement (also known as the profit and loss account), statement of financial position (also known as the balance sheet) and statement of cash flows (also ...

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