Strongpreneur#Business Growth Strategies
May 14, 2019 399
Strongpreneur#Business Growth Strategies
May 14, 2019 399
Accounting records can be defined as the details of documentation raised concerning the economic transactions of an enterprise, from the point of initiation to the point entry into the final accounts of the enterprise.
Such records include the documentary evidence of the transaction and the various entries made in the books of the enterprise.
To do well, every business must keep a record of its activities. This is so because a business must be able to tell the resources it has acquired and how these resources are used.
In accounting, the keeping of records starts with the source document of transactions, from which entries are made into books of primary entry and from there to books of secondary entries known as ledgers.
The accounts in the ledgers are balanced and a trial balance is extracted. It is from the trial balance the final accounts statements such as the balance sheet statement and the income statements are prepared.
In every business, enterprise information is needed to make decisions. Such decisions can be broadly grouped as follows:
In every business enterprise information is needed for the following:
This can be subdivided into the following categories:
To generate the necessary information as stated above it is imperative that there is a procedure for recording the transactions of the business that is simple, economical and enables information to be readily available.
The procedure is a sequence of clerical operations usually involving several people in one or more departments, established to ensure uniform handling of recurring transactions from the point of initiation to the point of reporting. An accounting system is built up from the merging of several accounting procedures. The procedures that make up an accounting system depend on the operation of the organization.
Procedures are important, as they assure the completeness of the accounting cycle if they are well implemented.
There are so many procedures, such as:
The various transactions must be recorded in source documents for the procedure to be executed.
Source documents are business forms for noting transactions that commence the process of the accounting cycle. They provide evidence that an economic event has occurred. They are also referred to as original transaction documents or initiating documents.
These documents are important as they act as the starting point of the accounting cycle and as evidence at different stages in the accounting process. They also serve as checks to minimize errors and fraud, because for as long as they are available, reference can be made to them for correction.
Some examples of sources documents and the event they record are as follows:
Documents Economic Events
(a) Cash register tapes = Cash sales
(b) Requirement Order = Purchase
(c) Time ticket and clock cards = Salaries and wages
(d) Monthly bank statements = Interest on bank accounts
(e) Check stubs = Withdrawals from the bank
(f) Bank Tellers = Deposit into the bank
(g) Vouchers = Payments
(h) Invoices = Credits sales
It is from source documents that economic events are recorded. For example, when an item is sold in a supermarket for cash, the cashier will capture the same in the cash register, which will show the total cash value of items sold to a particular customer.
The paper printout from the machine is usually like a tape, it will show the cash value of all items purchased from the supermarket that day. This register tape becomes a source document for cash sales. In the same way, a receipt issued to a customer is a source document and evidence of sale. Where the sale is on credit, it is first recorded in an invoice.
The invoice shows the total value of items sold, along with the name of the person purchasing the item, and the date of the transaction.
In reporting the economic and financial events of the business and determining the financial status of the business, the transactions from point of initiation to the preparation of the financial statement is captured by the accounting cycle.
For the procedures in the accounting cycle to be actualized, it is vital to have an accounting system in place. The accounting system of an organization is set up to ensure the completion of the accounting cycle by facilitating the recording, classification, and summarization of the financial transactions.
The accounting system consists of the methods procedures, devices, and personnel used by an entity to keep track of its financial activities and to summarize these activities in a manner useful to decision-makers.
The system provides information for use by both internal (management) and external users. For a small business, the accounting system is simply comprising of simple procedures, books, and inadequate accounting personnel.
The following are the steps in an accounting cycle:
The first record of a transaction in the accounting cycle is the journal. It is a chronological record of each business transaction. It provides a column for the date of the transaction an explanation, a posting reference, the debit and credit columns for the accounting involved.
It is the book in which entries are made before their posting to the ledgers. The ledger is the book in which transactions are recorded according to their nature, thus there are separate books or some other sort of collection points for data for each major function. These books in which prior entry are made are referred to as subsidiary books or books of prime entry,
Transactions such as sales, purchases, sales returns, and purchase returns have their prime books. Thus we have sales, purchases, sales return and purchases return journals. Where the transaction has nothing to do with sales or purchases, it is recorded in a prime book called General Journal.
It records a transaction that cannot be classified as sales or purchases. There is a special kind of journal which doubles as a book of prime entry and as a subsidiary book this cash book.
It is pertinent to note that a lot of transactions are done on credit. That is to say that cash is not immediately given or received when the transaction is concluded. This of necessity warrant that proper record is kept of such transactions such that the organization knows how much it is owing or expecting from customers.
A lot of business sales are usually done on credit. That is to say that the business does not immediately receive cash for what it selling. For each credit sales, the firm sends a document to the buyer showing the details of the items he has purchased. Such details would include the price of the items, a description of the items, the quantity and terms if any. This document is known as the invoice.
The original of the invoice is given to the buyer and the seller retains a copy for himself. It is from the invoice is given to the buyer and the seller retains a copy for himself. It is from this copy that the record of the transaction is made in the sales journal.
This journal is merely a list, in order of date of transaction, of each sales invoice showing the date, the name of the firm of buyers, the number of the sales invoice for reference purposes and the net amount expected from the buyer.
When the firm acquires goods without paying cash immediately for them we say what the purchase is on credit. This time the firm is a debtor to its suppliers until the amount for the goods is paid.
The supplier sends down the purchase invoice which details the information concerning the credit purchase transactions such as the amount of the goods, the terms of the transaction and the name of the supplier firm. The purchase journal is thus the record of these credit transactions in order of date of occurrence.
Sometimes there are instances in which goods that have already been sold or purchased are defective. In which cases it would be necessary to return such goods and reverse the liability for the same. This is referred to as sales return or purchase return whichever.
For the sake of proper record keeping, it would be necessary to take account of this especially if there are many instances of returns. Internally it will enable the management to rectify the problem associated with these returns. If purchase returns it may be necessary to change suppliers as the use of defective supplies could undermine the business.
Sales Return book or journal is prepared the same way the sale journal is prepared.
The word journal is used to refer to the record of transactions chronologically. This is done before any entry into the subsidiary book referred to as the ledger. The book referred to as the general journal is used to record all other transactions, which have not been previously recorded in the journals earlier discussed.
It is used to record the non-specialised transaction, which relates to a transaction not connected with sales or purchases. In accounting, sales refer to the disposal goods acquired to be sold, whereas purchases refer to the acquisition of goods to be sold. Examples of such non-specialised transactions would include the acquisitions of an asset such as vehicles, factory plants, and equipment. The firm derives benefits from separating this transaction from others entered in the other prime books.
The details entered in the journal would include the following:
Some of the use to which the journal can be put to include the following, the purchase of a fixed asset, the correction of errors, making opening entries and some other kind of transfer information contained in the general ledger.
No matter how sophisticated the journal is it must conform to the essentials shown above. Where computers are used the display may not accord with what is shown above but the information content is still the same.
For a lot of small businesses, the bulk of the transactions is usually in cash. This immediately puts the cashbook as a very important book in the record-keeping of any business. Every transaction that involves cash payment or receipts thus involves the cashbook.
The cashbook is a unique book because it doubles as a book of prime entry as well as a ledger. The cashbook is divided into two parts. The left side of the cashbook records debit transactions and the right side records credit transactions.
Generally, when a business grows large it may engage in a lot of cash transactions such that if they are recorded in the cash book, it may clog the main cash book with lots of details. To avoid this is a petty cash book is created.
A petty cash book is a small book used to record petty but frequently occurring expenses such as local transport, minor repairs, acquisition of petty stationery and postages, the amounts usually expended on these items are small but occur frequently.
The money for petty expenses is usually given to a petty cash officer, out of the main cash book. At the beginning of the period, the petty cash officer is given a particular amount. It is from this amount he pays for petty expenses.
At the end of the period, he is reimbursed to the tune of the amount he has spent such that at the beginning of the new period he has the particular amount he started with.
For any transaction to be posted to the cashbook or petty cashbook the transaction must be evidenced. If the transaction relates to receiving the cash the evidence is the receipt issued to that effect. Where the transaction relates to the payment of cash, it must be evidenced by a voucher.
A voucher is a document that records the fact that money has been paid or that can be used to pay for a particular good or service, it is a document mat authorizes the payment of the said amount. The payment voucher forms the basis for posting the cash book or petty cash book.
When the concept account is used, the reference is to the entries made in the general ledger. An account is a device used to provide a record of increases and decreases in each item that appears in the firm’s financial statement. An account essentially- tells the story of the increases and decreases in every item in the firm’s statement in figures. The general ledger is thus a collection of a complete set of accounts established by the firm. An account has three basic pans – they are:
Space is also provided for recording an account number, the date of the transaction, arid some ancillary information.
The information earlier recorded in the journals is then posted to the general. The information earlier recorded in the journals is then posted to the general ledger to complete the process – this is referred to as posting entries to the ledger.
A trial balance is a schedule of balance extracted from the various accounts contained in the general ledger. It enables us to establish if the double-entry principle has been obeyed. As its name implies, it is a trial of the balances of the accounts to check the accuracy of the entries. As earlier enunciated every transaction gives rise to two entries, a debit entry, and a credit entry. This is the double-entry principle in accounting.
The trial balance contains the final balances in the various accounts in the ledger. Depending upon the larger side of the account it may either have a debit balance or a credit balance. It is these various balances that are collected in the trial balance to establish the proper execution of the double-entry principle. Let us see an example of a trial balance.
The principal objective of this process as seen from the definition of accounting is the eventual summarization of the transaction of the organization to provide information for various uses by the management of the organization. The final destination of the accounting cycle is the preparation of final accounts.
This comprises the following:
For a small enterprise, we will be concerned principally with the first two statements.
It is the financial statement that discloses the result of the operation of the business over a given period. It aims at measuring whether the business achieved or failed to achieve the primary objective of earning an acceptable level of income.
In another vein, it attempts to evaluate the operating efficiency of management use of funds. The income statement tells us if the efforts of the- owner of the business have been worth it. This is so if the organization makes a profit, which is the excess of revenue over expenses.
From the profit and loss account, the owner can tell whether to continue in this line of business or not.
The balance sheet depicts essentially the financial position of an entity on a particular date. It presents a view of the business as the holder of assets or resources that are equal to the sources of or claims against those assets.
The sources show how assets have been financed either through owners or contributions often referred to as owner capital or equity or through liability or external debts. The balance sheet consists of three basic elements.
This is a source of funding a business whereby the individual – called the owner or proprietor of the business – contributes capital. He is the risk-taker of the business.
The equity holder or owner is entitled to the residual interest in the assets of the business after meeting the obligation of interest payments.
These are items of value in the business. They are either tangible as in building, plants and machinery or intangibles such as goodwill and patents. Assets are usually classified as fixed where they have a useful life exceeding one year or as a current asset where their useful life does not exceed one year.
These occur when a business is indebted to other outside parties as a result of borrowing or other credit transactions. Like assets, we can have long-term liabilities or current liabilities depending upon the duration of the liabilities.
The cash flow statement discloses the pattern of cash generation and utilization by a business over a period indicating the adequacy or otherwise of the amount of cash accruing from the various sources. These sources include the normal operation of the business, investing activities and financing activities. The importance of this statement to a firm is that a firm must able to tell if generating enough cash to continue the business.
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