ADVANTAGES
how is accounting useful to me?
A: Accounting is
the international "language" of business, so if you have ever thought
that you may work in a business of any kind, knowing accounting will give you
an edge over others who don't.
By "international language of
business" I mean accounting contains things like income
statements and balance
sheets and other
accounting reportswhich communicate how a business is performing and what
sort of position they are in. If you know accounting you can read these reports and understand them. if you
don't know accounting they will be meaningless.
Your accounting studies give you the theoretical
basis of the subject and teach you the rules and practices of accounting. After
your studies you will start to see it in practice in business. There you will
get first-hand experience with income, expenses, assets, liabilities and
owner's equity. You will see these things in action.
Having accounting studies as part of your resume
or curriculum vitae will definitely make you more of an asset to prospective
employers, even if you are not applying for a job as a bookkeeper or
accountant. So in other words, it makes you generally more hire-able by
companies.
As a final note, knowing accounting is also
useful from the point of view of being able to handle your own finances better.
You can budget and plan your spending and even draw up personal financial
statements - a personal income statement and/or balance sheet. So knowing
accounting would then give you more control over your personal finances too.
An account (in bookkeeping) refers to assets, liabilities, income, expenses, and equity, as
represented by individual ledger pages, to which
changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become
part of a book of final entry or ledger. Examples of common financial accounts are cash, accounts receivable, mortgages, loans,PP&E, common stock, sales, services, wages, and payroll.
A chart of accounts provides a listing of all financial accounts used by
particular business, organization, or government agency.
The system of recording, verifying, and reporting such
information is called accounting. Practitioners of accounting are called accountants.
INTRODUCTION
The purpose of accounting is to provide a means
of recording, reporting, summarizing, and interpreting economic data. In order
to do this, an accounting system must be designed. A system design serves the
needs of users of accounting information. Once a system has been designed,
reports can be issued and decisions based upon these reports are made for
various departments. Since accounting is used by everyone in one form or
another, a good understanding of accounting principles is beneficial to all.
All of the following accounting terms have
precise definitions when used in business:
• Sales or revenue
• Cost of goods sold
• Expenses
• Gross profit
• Fixed assets
• Current assets
• Current liabilities
• Working capital
• Liquidity
• Debtor
• Creditor
• Bad Debt
• Depreciation
• Accrual Accounting
Read the following definitions carefully and make sure
that you understand exactly what is meant by each of these accounting terms.
This Accounting Terminology Checklist outlines
the terminology, concepts and conventions that are accepted within the
accounting profession.
Sales or Revenue
Revenue is the income that flows into an organization, and it is often used
almost synonymously with sales. In government and nonprofit organizations it
includes taxes and grants.
Don't confuse revenues with receipts. Under the accrual basis of accounting, revenues are shown in the period they are earned, not
in the period when the cash is collected. Revenues occur when money is earned;
receipts occur when cash is received.
Cost of Goods Sold
This is the purchase cost of the merchandise that was subsequently sold to
customers.
Expenses
Refers to the other costs that are not matched with sales as part of the cost
of goods sold. They may be matched with a specific time, usually monthly,
quarterly, or annually or they may also be one-off payments. Expenses include:
staff wages, rent, utility bills, insurance, equipment, etc.
Gross Profit
Refers to what is left after you subtract the cost of goods sold from the
sales. It is also called gross margin. For example, if an organization buys in
an item for $50 and sells it for $75 (plus sales tax), then the gross profit
will be $25.
Fixed Assets
This refers to all of those things that the business owns which will have a
value to the business over a long period. This is usually understood to be any
time longer than one year. It includes freehold property, plant, machinery,
computers, motor vehicles, and so on.
Current Assets
This refers to assets with the value available entirely in the short term. This
is usually understood to be a period of less than a year. This is either
because they are what the business sells or because they are money or can
quickly be turned into money. Examples of assets include
inventory/stock, money owing by customers, money in the bank, or other
short-term investments.
Current Liabilities
This refers to those things that the business could be called upon to pay in
the short term - within the year. Examples include bank overdrafts and money
owing to suppliers.
Working Capital
This is the difference between current assets and current liabilities. An
organization without sufficient working capital cannot pay its debts as they
fall due. In this situation it may have to stop trading even if it is
profitable.
Liquidity
This is the ability to meet current obligations with cash or other assets that
can be quickly converted into cash in order to pay bills as they become due. In
other words the organization has enough cash or assets that will become cash so
that it is able to write checks without running out of money.
Debtor
A debtor is a person owing money to the business, for example a customer for
goods delivered.
Creditor
A creditor is a person to whom the business owes money, for example a supplier,
landlord, or utility organization.
Bad Debt
All reasonable means to collect a debt have been tried and have failed so the
amount owed is written off as a loss and becomes categorized as an expense on
an income statement. This results in net income being reduced.
Depreciation
Assets have a certain length of time in which they operate efficiently,
referred to as 'an asset's useful life.' During this period the value of that
asset depreciates due to age, wear and tear, or obsolescence. The loss in value
is recorded in accounts as a non-cash expense, which reduces earnings whilst
raising cash flow.
Accrual Accounting
Accrual accounting relies on two principles, which have already been alluded
to:
The revenue recognition principle states
that revenues are recognized when they are realized or realizable, and are
earned (usually when goods are transferred or services rendered), no matter
when the payment is received.
The matching principle states
that expenses are recognized when goods are transferred or services rendered,
and offset against recognized revenues, which were generated from those
expenses, no matter when the cash is paid out.
These two principles are absolutely central to
understanding how accrual accounting works and are described in detail in the
next section
An account
may be classified as real, personal or as a nominal account
|
Type
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Represent
|
Examples
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|
Real
|
Physically tangible things in the real world and certain
intangible things not having any physical existence
|
Tangibles
- Plant and Machinery, Furniture and Fixtures, Computers and Information
Processing Equipment,Cash Accounts etc. Intangibles -Goodwill, Patents and Copyrights
|
|
Personal
|
|
|
|
Nominal
|
Temporary
Income and Expenditure Accounts for recognition of the implications of the
financial transactions during each fiscal year till finalisation of accounts at the
end
|
Sales,
Purchases, Electricity Charges
|
Example: A
sales account is opened for recording the sales of goods or services and at the
end of the financial period the total sales are transferred to the revenue
statement account (Profit and Loss Account or Income and Expenditure Account).
Similarly
expenses during the financial period are recorded using the respective Expense
accounts, which are also transferred to the revenue statement account. The net
positive or negative balance (profit or loss) of the revenue statement account
is transferred to reserves or capital account as the case may be.
The accounting process is three separate
types of transactions used to record business transactions in the accounting
records. This information is then aggregated into financial statements. The
transaction types are:
1.
The first transaction type is to ensure
that reversing entries from the previous period have, in fact, been
reversed.
2.
The second group is comprised of the
steps needed to record individual business transactions in the accounting records.
3.
The third group is the period-end
processing required to close the books and produce financial statements.
We will address these three parts of the
accounting process below.
Beginning of Period
Processing
Verify that all transactions designated
as reversing entries in preceding periods have actually been reversed. Doing so
ensures that transactions are not recorded twice in the current period. These
transactions are usually flagged as being reversing entries in the accounting
software, so the reversal should be automatic. Nonetheless, examine the
accounts at the beginning of the period to verify the reversals. If a reversing
flag was not set, an entry must be reversed manually, using a new journal
entry.
Individual
Transactions
The steps required for individual
transactions in the accounting process are:
1.
Identify
the transaction. First, determine what kind of
transaction it may be. Examples are buying goods from suppliers, selling
products to customers, paying employees, and recording the receipt of cash from
customers.
2.
Prepare
document. There is frequently a business
document to be prepared or recognized to initiate the transaction, such as an
invoice to a customer or an invoice from a supplier.
3.
Identify
accounts. Every business transaction is recorded
in an account in the accounting database, such as a revenue, expense, asset,
liability, or stockholders' equity account. Identify which accounts are to be
used to record the transaction.
4.
Record
the transaction. Enter the transaction in the
accounting system. This is done either with a journal entry or an on-line
standard transaction form (such as is used to record cash receipts against open
accounts receivable). In the latter case, the transaction forms record
information in a pre-determined set of accounts (which can be overridden).
These four steps are the part of the
accounting process used to record individual business transactions in the
accounting records.
Period-End Processing
The remaining steps in the accounting
process are used to aggregate all of the information created in the preceding
steps, and present it in the format of financial statements. The steps are:
1.
Prepare
trial balance. The trial balance is a listing of the
ending balances in every account. The total of all the debits in the trial
balance should equal the total of all the credits; if not, there was an error
in the entry of the original transactions that must be researched and
corrected.
2.
Adjust
the trial balance. It may be necessary to adjust the
trial balance, either to correct errors or to create allowances of various
kinds, or to accrue for revenues or expenses in the period.
3.
Prepare
adjusted trial balance. This is the original trial balance,
plus or minus all adjustments subsequently made.
4.
Prepare
financial statements. Create the financial statements from
the adjusted trial balance. The asset, liability, and shareholders' equity line
items form the balance sheet, while the revenue expense line items form the
income statement.
5.
Close
the period. This involves shifting the balances in
the revenue and expense accounts into the retained earnings account, leaving
them empty and ready to receive transactions for the next accounting period.
6.
Prepare
a post-closing trial balance. This version of the
trial balance should have zero account balances for all revenue and expense
accounts.
In reality, any accounting software
package will automatically create all versions of the trial balance and the
financial statements, so the actual steps in the accounting process may be
considerably reduced. Instead, the steps used in a computerized environment are
likely to be:
1.
Prepare
financial statements. This information is automatically
compiled from the general ledger by the accounting software.
2.
Close
the period. The accounting staff closes the
accounting period that has just been completed, and opens the new accounting
period. Doing so prevents current-period transactions from being inadvertently
entered into the prior accounting period. In a multi-division company, it may
be necessary to complete this period closing step in the software for each
subsidiary.
Similar Terms
The accounting process is also known as
the accounting cycle.
Bookkeeping is the recording of financial
transactions, and is part of the process of accounting in business.[1] Transactions include purchases, sales, receipts,
and payments by an individual person or an organization/corporation. There are
several standard methods of bookkeeping, such as the single-entry
bookkeeping system and the double-entry
bookkeeping system, but, while they may be thought of as
"real" bookkeeping, any process that involves the recording of
financial transactions is a bookkeeping process.
Bookkeeping is usually performed by a bookkeeper. A bookkeeper (or book-keeper) is a
person who records the day-to-day financial transactions of a business. He or
she is usually responsible for writing the daybooks, which contain records of purchases,
sales, receipts, and payments. The bookkeeper is responsible for ensuring that
all transactions are recorded in the correct daybook, supplier's ledger,
customer ledger, and general ledger; an accountant can then create reports
from the information concerning the financial transactions recorded by the
bookkeeper.
Single-entry system
The primary bookkeeping
record in single-entry bookkeeping is the cash book, which is similar to a checking account (UK: cheque account,
current account) register, but allocates the income and expenses to various
income and expense accounts. Separate account records are maintained for petty
cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses. These days, single-entry bookkeeping can be
done with DIY bookkeeping software to
speed up manual calculations.
Double-entry system
A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two
different nominal ledger accounts.
A daybook is a descriptive and
chronological (diary-like) record of day-to-day financial transactions also called a book of original entry. The daybook's details
must be entered formally into journals to enable posting to ledgers. Daybooks
include:
·
Sales daybook, for recording all the sales invoices.
·
Sales credits daybook, for recording all the sales credit notes.
·
Purchases daybook, for recording all the purchase invoices.
·
Purchases Debits daybook, for recording all the purchase Debit
notes.
·
Cash daybook, usually known as the cash book, for recording all
money received as well as money paid out. It may be split into two daybooks:
receipts daybook for money received in, and payments daybook for money paid
out.
·
General Journal daybook, for recording journals.
A petty cash book is a record of small-value purchases before they are later
transferred to the ledger and final accounts; it is maintained by a petty or
junior cashier. This type of cash book usually uses the imprest system:
a certain amount of money is provided to the petty cashier by the senior
cashier. This money is to cater for minor expenditures (hospitality, minor
stationery, casual postage, and so on) and is reimbursed periodically on
satisfactory explanation of how it was spent.
Journals
Journals are recorded in the
general journal daybook. A journal is a formal and chronological record of financial transactions before their values are accounted for in the general ledger as debits and credits.
A company can maintain one journal for all transactions, or keep several
journals based on similar activity (e.g., sales, cash receipts, revenue, etc.),
making transactions easier to summarize and reference later. For every debit journal entry recorded, there must be an equivalent credit journal entry to maintain a balanced accounting equation.[3]
Ledgers
A ledger is a record of accounts. These
accounts are recorded separately, showing their beginning/ending balance. A journal
lists financial transactions in chronological order, without showing their balance but
showing how much is going to be charged in each account. A ledger takes each
financial transaction from the journal and records it into the corresponding
account for every transaction listed. The ledger also sums up the total of
every account, which is transferred into the balance sheet and the income statement. There are three different kinds of
ledgers that deal with book-keeping:
·
Sales ledger, which deals mostly with the accounts receivable
account. This ledger consists of the records of the financial transactions made
by customers to the business.
·
Purchase ledger is the record of the purchasing transactions a
company does; it goes hand in hand with the Accounts Payable account.
Abbreviations used in bookkeeping
·
A/C – Account
·
Acc – Account
·
A/R – Accounts receivable
·
A/P – Accounts payable
·
B/S – Balance sheet
·
c/d – Carried down
·
b/d – Brought down
·
c/f – Carried forward
·
b/f – Brought forward
·
Dr – Debit
·
Cr – Credit
·
G/L – General ledger; (or N/L – nominal ledger)
·
P&L – Profit and loss; (or I/S – income statement)
·
P/R - Payroll
·
PP&E – Property, plant and equipment
·
TB – Trial Balance
·
CST – Central sale tax
·
TDS – Tax deducted at source
·
AMT – Alternate minimum tax
·
EBITDA – Earnings before interest, taxes, depreciation and
amortisation
·
EBDTA – Earnings before depreciation, taxes and amortisation
·
EBT – Earnings before tax
·
EAT – Earnings after tax
·
PAT – Profit after tax
·
PBT – Profit before tax
·
Depr – Depreciation
·
Dep – Depreciation
·
CPO – Cash paid out
·
CP - Cash Payment
A chart of accounts is a list of the accounts codes that can be identified with numeric, alphabetical, or
alphanumeric codes allowing the account to be located in the general ledger.
The equity section of the chart of accounts is based on the fact that the legal
structure of the entity is of a particular legal type. Possibilities include sole trader,partnership, trust, and company.[4]
Computerized bookkeeping[edit]
Computerized bookkeeping
removes many of the paper "books" that are used to record the
financial transactions of an entity—instead, relational databases take their
place, but they still typically enforce the double-entry
bookkeeping system and methodology.
Difference Between Journal and Ledger
Double entry system of bookkeeping says that
every transaction affects two accounts. There is a proper procedure for
recording each financial transaction in this system. The procedure starts
from journal followed by ledger, trial balance and final accounts. Journal and
Ledger are the two pillars which creates the base for preparing final accounts.
The Journal is a book where all the
transactions are recorded immediately when they take place which are then
classified and transferred into concerned account known as Ledger.
A little bit of confusion takes birth in the
mind of all the accounting students regarding these two books. In this
article we have compiled all the important differences between Journal and
Ledger.
Content: Journal Vs Ledger
- Comparison Chart
- Definition
- Key Differences
- Conclusion
Comparison
Chart
|
BASIS FOR COMPARISON
|
JOURNAL
|
LEDGER
|
|
Meaning
|
The book in which all the transactions
are recorded, as and when they arise is known as Journal.
|
The book which enables to transfer all
the transactions into separate accounts is known as Ledger.
|
|
What is it?
|
It is a subsidiary book.
|
It is a principal book.
|
|
Also known as
|
Book of initial entry.
|
Book of final entry.
|
|
Process
|
The process of recording transactions
into Journal is known as Journalizing.
|
The process of transferring entries
from the journal to ledger is known as Posting.
|
|
How transactions are recorded?
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Sequentially
|
Account-wise
|
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Debit and Credit
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Columns
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Sides
|
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Narration
|
Must
|
Not necessary.
|
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Balancing
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Need not to be balanced.
|
Must be balanced.
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