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sophisticated. The various type of accounting practices adopted by small businesses includes the following: The “Envelope” System The record keeping process of most small business that attempt to keep some form of records often consists of saving check stubs, invoices and other documents in brown envelopes which they hand over to their accountant at the year end. The “envelope” system can be further subdivided into: 1. The multiple envelope system In this organization, the documents for each type of transaction are kept in separate envelopes. The documents are properly batched and labeled. 2. The single envelope system The documentation for all the company’s transactions are kept in the same envelope. There is no separation or classification of the documents into transaction type. 3. The incomplete envelopes The documentation is incomplete and disorganized.
The Accounting Information System
Classifying Summarizing Organizing
Events & Transactions
Accounting is an information and measurement system that identifies, records and communicates relevant, reliable and comparable information about an organization’s economic activities. The aim of accounting is to provide verifiable information about what a business owns, what it owes and how it has performed.
Lagos Business School, December 2003 -1-
money. timeliness. presentation and interpretation of economic data.g. December 2003 -2- . reliability and completeness. Record the transaction into the accounting journal EXAMPLE Taxi fare (Account name: Transportation) Expenditure/withdrawal Record withdrawal of cash (credit cash account) Record expenditure on transportation (debit transportation account) Some forms of documentation used in recording transactions are: Receipts Vouchers Invoices Lagos Business School. understandability. Cash withdrawal and Purchase of goods) A good bookkeeping system is characterized by simplicity. Establish the event or transaction and identify the relevant account 2. It records the two sides of a financial transaction between the company and an external party (e. or other items of economic value o The exchange must be between the company and an External party o Documentation must be generated as Evidence of the transaction o The transaction must me quantifiable in Monetary terms Steps in Recording Transactions STEPS 1. The Financial Transaction Financial transactions normally have the following characteristics: o The event must involve an Exchange of goods. Confirm whether the transaction is a withdrawal (credit) or deposit (debit) of cash 3.Accounting is about the collection. accuracy. consistency. Bookkeeping or Record keeping is the basic first step to providing accounting data.
Expenses (expenditure incurred) All ledger accounts are listed in a summary form known as the Trial balance (eg. creditors etc) These accounting entries are recorded and periodically summarized in the form of the financial statements. Smith: =N=20. debtors. The Balance Sheet 2. The Profit and Loss Account 3. Sales (income earned) 5.g. Liabilities (what the business owes) 3. Debit and Credit notes Delivery notes Tickets Banking tellers and cheque books The documents are always dated and securely stored The Accounting Cycle Transaction that occur are evidenced by source documents (e. The Cash Flow Statement (Published with accompanying notes to the accounts) Lagos Business School.000) The transaction is recorded in a journal (Mr Smith: =N=20. Assets (what the business owns) 2. an invoice: sale to Mr. The Financial Statements The three principal financial statements are: 1. December 2003 -3- . Smith) The general ledger is classified into five sets of accounts: 1. summary of all debtors including Mr.g. Capital (equity) 4.000) The journal entries in the individual accounts are summarized in a book of accounts known as a General ledger (e. Cash.
inventory valuation. government. competitors) Preparation of financial statements The figures in the financial statement arise as follows: Business strategy ---> Business decisions ---> Business transactions ---> Accounting transactions ---> Accounting entries The preparation of financial statements is moderated by: Regulations: rules governing the preparation of financial statements o Companies and Allied Matters Act 1990 (CAMA 1990) regulates setting up and operation of limited liability companies o Professional Accounting Bodies: Statement of Accounting Standards (SAS) uniformity accounting reporting practices.g. The company’s policies must be disclosed by way of note to the accounts. rules and procedures chosen by a company as most appropriate to their business. creditors. December 2003 -4- . regulatory bodies.Users of Financial Statements These include investors. employees. Generally Accepted Accounting Principles (GAAP) o Others: International Accounting Standards Concepts: broad assumptions underlying preparation and presentation of financial statements o The Entity: the company is a separate entity from the its owners and other firms o Cash Vs Accrual: includes timing & matching of revenues and expenses o Objectivity: complete. Lagos Business School. others (e. e. Unbiased. quantifiable transactions o Prudence o Going concern: he business will continue in operation indefinitely o Consistency o Materiality Policies: Specific accounting bases.g.
It shows the financial strength (financial position) of the company.The Balance Sheet The balance sheet tells you where your business stands as of the date you specify. what you own and what you owe The balance sheet can be represented as: Resources = Sources of capital ASSETS = (What you own) Income generating resources LIABILITIES + OWNERS EQUITY (What you owe) Further illustrated as: ASSETS LIABILITIES & OWNERS EQUITY Current Assets Current Liabilities Long-Term Liabilities Fixed Assets Owners Equity & Reserves Lagos Business School.e. December 2003 -5- . It is also a summary of the resources and the sources of capital i.
e. include the cost motor vehicles. equipment. bank overdraft. prepayments Fixed Asset items. accrued expenses Long-Term Liabilities are long-term loans due after one year Shareholders Funds can be divided into contributed capital and earned capital (retained earnings) The Profit and Loss Statement The profit and loss statement. also known as the income statement. December 2003 -6- . tells you how much money you have made or lost within a specified period. fixtures & fittings. net of depreciation (i. Revenue minus Expenses = (Receipt) (Expenditure) PROFIT (surplus) or LOSS (deficit) All costs incurred in generating revenue must be allocated in order to know if the transaction was at a profit or loss The Cash Flow Statement This statement summarizes the movements of cash in and out of the company during the period i. accounts receivable. a provision for the wear and tear of the item over time) Examples of Current Liabilities (amounts due within one year) are accounts payable. inventory. It shows the ability of the company to survive by highlighting the results of three activities generating cash flows: o Operating activities o Investing activities o Financing activities Lagos Business School.e. the results of operations). the sources from where cash was generated by the company and how it was used.Some typical items that make up the Current Assets are cash.e. It shows the financial performance (i.
problems and prospects. They should not be interpreted in isolation of other information Lagos Business School. They reflect past performance and events. They provide information about the firm’s performance. The different accounting methods used by companies affects comparability even within the same industry Financial statements are historic. The published statements always include the auditors report to the members of the company. They reflect past performance and events.The Usefulness of the Financial Statements Financial statements are the scorecard of the business. the data collected. and are limited by. December 2003 -7- . stating their opinion on the “truth and fairness” of the view of the company as given in the financial statements The Limitations of the Financial Statements Accounting reports are based on. They should not be interpreted in isolation of other information The different accounting methods used by companies affects comparability even within the same industry Financial statements are historic.
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