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This chapter introduces accounting as the language of business and finance. Rather than diving into technical mechanics, it explores the why behind accounting - its purpose, users, and role in decision-making, ethics, and sustainability.

By the end of this chapter, you will be able to:

Explain what accounting is and why it matters to businesses and society
Identify internal and external users of financial information and the decisions they make
Understand how accounting supports transparency, accountability, and resource allocation
Recognise the ethical responsibilities of accountants and their expanding role in sustainability

Core concepts include:

The definition and function of accounting
The flow of financial information from transaction to decision
Primary users of accounting information
Examples of decisions supported by accounting
Introduction to ethics and the ICAEW Code of Ethics
The connection between accounting and environmental/social responsibility

1.1 What Is Accounting?

Accounting is the process of identifying, recording, summarising, and reporting financial transactions of a business. It provides structured financial information that helps owners and decision-makers understand how a business is performing and where it stands financially. You can think of accounting as the "language" of business - a way to tell the story of what's happening inside an organisation using numbers and reports.

For example, imagine a local café that wants to know whether it made a profit last month, how much it spent on ingredients, or how much cash it has left to pay suppliers. Accounting helps the owner answer all of these questions with evidence.

1.2 Why Do We Need Accounting?

Accounting is essential because it brings structure, reliability, and clarity to financial information. Businesses, governments, and individuals use accounting to track their performance, meet legal and tax obligations, and make decisions about the future.

Without accounting, it would be difficult to answer even basic questions like: "Did we make a profit?", "Can we afford to hire another employee?", or "Do we have enough funds to repay a loan?" More broadly, accounting supports transparency and trust. It allows investors, lenders, and the public to understand how organisations are using their resources and whether they are being managed responsibly.

1.3 Stakeholders Who Use Accounting Information

A stakeholder is any person, group, or organisation that has an interest in or is affected by a business and its activities. Stakeholders may be involved in decision-making, rely on the business's success, or be impacted by its operations.

Internal stakeholders include:

Business owners and managers, who need accurate information to make decisions about operations, investments, and strategy
Employees, who may use financial information to assess job security, bonus potential, or performance

External stakeholders include:

Investors, who need to know whether the business is profitable and financially stable
Lenders such as banks, who assess the company's ability to repay loans
Government agencies, including HMRC, who need financial records to calculate taxes
Suppliers, who want to know whether a business can pay them on time
Customers, who might rely on the financial stability of a supplier
The general public, especially in the case of large companies that impact the environment, society, or the economy

Accounting helps stakeholders make informed, evidence-based decisions. For example:

Managers use accounting to track profitability, control costs, and plan for future growth
Business owners use it to evaluate whether they can afford new equipment or hire more staff
Investors use accounting to decide whether to buy or sell shares
Lenders use accounting to determine the level of risk in offering a loan

By providing timely and reliable financial information, accounting enables better planning, risk management, and allocation of resources.

1.4 Sole Traders and Companies

Businesses can take many legal forms, and each one has different implications for ownership, responsibility, tax, and financial reporting. These differences affect how capital is treated in the accounts and how financial information is presented.

The two types of business entities you'll encounter in this module are:

a) Sole traders
b) Companies

Each structure has unique characteristics, which we'll explore below.

a) Sole Trader

A sole trader is the simplest form of business structure where one person owns and operates the business. The owner has unlimited liability and is personally responsible for all business debts and obligations.