Introduction

• Accounting provides a picture of a business in financial terms

• Accountants record information in many different forms. Each method
has a different purpose
Journals
ledgers
Trial Balance
Financial Statements
• Each transaction can be traced forwards and backwards through the
financial cycle – Audit Trail
.Internal controls
• Internal Controls – Internal procedures that a company maintains as
safeguards against fraud and error
• The stronger these are the less stringent can be the audit checks
• Most of the controls are centered around inventory

• Financial or Non-financial
• Accounting and non-accounting
• Financial accounting and Management Accounting
Financial Accounting
• Provides general accounting information
• Users of this information includes
• Owners (shareholders)
• Those who would have lent money to the business ( Creditors)
• There are rules governing the way that accounting information is
recorded, what is disclosed and the format in which it is disclosed.
• These rules are law and companies must follow them
Management Accounting
• Management accounting provides the internal information that
managers need to run a company
• This information is not publicly available
• It is prepared for very specific purposes i.e. to allow managers to
make decisions and do a better job of managing
• Each company will have different requirements and different
decisions will need to be made about each company at different times
• So there is a lot of flexibility in the area of Management Accounting
Management Accounting contd.
• Example:

A furniture manufacturer and a maker of ladies' blouses will both need

to know how large their production runs should be; will both need to
know how much raw material to use, how many employees to use and
the profit margin they need to set to cover all costs and make a profit.
However, the specific details will vary for each business.
Customs
• Information required for Customs and Tax proposes are usually generated when
requested, but are not maintained on a da basis.
• The accountant (accounting firm) is paid to generate the information for Customs
and Tax purposes
• As you know, companies prepare self-assessments of both the obligation to pay
company tax and their obligation to pay Customs duties. This represents a major
change in the way that governments view companies and their managers. It
views them as inherently honest. In the past, when everything was checked and
double-checked, taxpayers were viewed as inherently dishonest. But this created
an enormous workload for government checking all details and it was not
justified by the number and size of the mistakes and deliberate miscalculations
that they found.
Customs contd.
• Now, most modern Customs administrations audit selected companies to determine
whether they have correctly stated their obligation to pay duty or maintained their Customs
or Excise warehouse operations in accordance with the law. The difficulty with this is that it
means that Customs officers need to understand company accounting practices and this can
vary from company to company.
• This course is designed to help you understand the differences between what companies
record and what you need to find for Customs purposes. The reason there is a difference is
that companies are required to record their accounting information in the way set out in
the Corporations Law, which means they have to keep their accounting records in a way
consistent with the requirements of accounting standards. Companies do not have a choice
about this - it is the law and is mandatory.
• Companies are required to compile assessments or declarations for Customs purposes but
they are not required to keep their accounting system specifically for Customs purposes.
Cycle of Accounting Information
Accounting Cycle
Source Documents
• The documents that record transactions when they first occur
(whether they are sales, purchases, loans or some other type of
transaction) are called source documents.
• If you are trying to work out what has happened in a company's
financial records, you know that you can trace back every transaction
until you reach the source document that originally generated that
transaction.
• Each source document is recorded in the Journals of the company
Accounting Cycle
Journals
Definition:- A Journal is a list of transactions of the business in chronological
order.
• Large companies record journals chronologically by days ( at the end of the
day)
• Summarised totals of the transactions will be compiled and recorded in the
business’ general journal.
• These summarized entries could be reconciled to the detailed list from the
cashier’s register.
• There is nothing in accounting that cannot be followed back through the
accounting system to a source document, which is the proof that the
transaction actually occurred.
Accounting Cycle
Journals
• Businesses can use whatever journals they want to
• These are the books in which transactions are first entered before being
recorded in the ledgers
• The five more common journals are:
• Cash payments Journal
• Cash receipts journal
• Purchase journal
• Sales journal
• General journal
Accounting Cycle
Journals
• Other journals include:-
Sales Returns
Purchase Returns
• These are also known as the books of Prime Entry or Subsidiary
Books.
• These journals have been used since Accounting was manual.
• Journals are useful in determining the balance of our cash or the
amount of any credit that the business owes or that is owed to the
business. It would be tedious to determine stock balances etc.
Accounting Cycle
Ledgers
• The chronological data from the journals are recorded in Ledgers by
account.
• What they mean is that they maintain separate details for each type
of item
• Like items are grouped together for ready reference.
• The ledger provides information on the transaction history and
current balance in each account, throughout the accounting period.
These records are the competent source of data for building a
company’s financial reports.
Accounting Cycle
Ledgers
• Some of the common types of ledger accounts which most
businesses maintain include cash, accounts receivable (also called
debtors or sundry debtors; this is a list of money that a business is
owed), accounts payable (also called creditors or sundry creditors;
this is a list of money that the business owes third parties), vehicles,
land, buildings, plant and equipment, wages, mortgage, and sales.
• This is the beginning of double entry accounting (debit and credit)
within the accounting cycle.
Accounting Cycle
Ledgers
• At any given time, managers could find out the exact balance of any
item connected with the business by looking at the balance of the
relevant ledger account
• The cash account shows cash that comes into the business, from
whatever source, and cash that is paid out by the business, for
whatever reason, so the balance is the actual cash on hand
• Accounts payable shows amounts you owe less any payments you
make off the amounts you owe, so the balance will be what is left of
what you owe at any given time.
Accounting Cycle
Ledgers
• The accounts receivable account shows what third parties owe the
business less what they have paid off what they owed.
• Companies are required by law to work out the balance of all their
ledger accounts once a year (more often if they are public companies,
which mean they trade their shares on the Stock Exchange)
• They do this by listing all the final balances of the ledger accounts in a
trial balance, which is a list of ledger account totals
• These totals form the basis for the financial statements of the
business
Accounting Cycle
Trial Balance
Definition: - The Trial Balance is an internal report that list the closing
balances of the Ledger Accounts at the end of an accounting period.
• The total debits must equal to the total credits to ensure that there
are no unbalances ledgers / incorrect journals in the accounting
system. This also ensures that the financial statements are accurate
• The initial Trial Balance is the “Unadjusted Trial Balance”. Once the
errors are removed and the Trial Balance meets the IAS compliance it
becomes an “Adjusted Trial Balance”
• The Trial Balance will form the basis for the company’s financial
statement.
Accounting Cycle
Financial Statements
• The financial Statements are prepared from the balances in the Trial Balance
• They determine the ability of a business to generate cash, the sources and
uses of that cash
• To determine whether a business has the capability to pay back its debts
• To track financial results on a trend line to spot any looming profitability
issues
• To derive financial ratios from the statements that can indicate the condition
of the business
• To investigate the details of certain business transactions, as outlined in the
disclosures that accompany the statements.
Accounting Cycle
Financial Statements
• The Statement Of Comprehensive Income ( Trading And Profit And Loss
Account or Income Statement). This shows the revenue earned, the cost of
earning that revenue, the expenses incurred and whether a profit or a loss
was made for that accounting period.
• Statement of Financial Position ( Balance Sheet). This shows the financial
position of the company at a particular point in time. What it owns and what
it owes (assets and liabilities).
• Statement of Changes in Equity (Statement of Retained Earnings) this details
the movement in owners equity over a period.
• Statement of Cash Flows presents the movement of cash (including bank)
over a period.
Accounting Cycle
Summary
• So the accounting cycle starts with a transaction generating a source
document. Details of this document are recorded in a journal. This
information is posted to a ledger account. The balance of the ledger
account will form part of the company's trial balance and the trial
balance will form the basis for the company's financial statements.
• Computerized accounting systems simplify the recording process. A
keyboard operator can key in the details of the initial transaction and
with the press of a key, the transaction automatically appears in the
journal, ledgers, and an updated trial balance and financial
statements can be printed out.
Accounting Cycle
Summary
• Accounting provides a picture about what has happened in a business.
Accountants can also provide budgeted information to allow for future
planning
• Companies produce both financial accounting and management
accounting information. These two sub-sets of accounting information
have different purposes; financial information is external information that
a company provides about itself but management accounting is internal
information that it keeps confidential.
• Customs officers have the power to access both types of accounting
information. That is why it is important that we understand the different
rules (or lack of rules) that control what information company's record for
financial or management accounting purposes
Accounting Cycle
Summary

• The same recording cycle is used by all companies to record their

financial information.
• The cycle goes from transaction to source document, to journals, to
ledgers, to trial balance, to financial statements. Each part of the cycle
summarises accounting information in a slightly different way.
• It is always possible to trace any transaction from its source document
through to where it appears in the financial statements or back from
the financial statements through to its original source document. This
is called maintaining an audit trail.
Purchasing and Revenue Cycle
• Businesses purchase all sorts of things. They buy raw materials which are
then used to manufacture other goods which they then sell
• There should be supporting documentation for all purchases. This is part of
maintaining an audit trail and also a control device. Businesses need to
control who can and who cannot make purchases on behalf of a firm
• The way that most firms minimise the control risks associated with
purchasing is by maintaining a separate purchasing department. All
purchases must be made by this department or at least, they must
authorise all purchases.
• It is unusual for goods to be delivered to the purchasing department. That is
because doing so would create a control risk. The purchasing department's
staff should order goods not receipt them as having been delivered.
Classification of Accounts
1. Personal Accounts
• These are Accounts that deal with people and firms. Debtors and Creditors –
these are the receivable and payable accounts found in the sales and
purchases ledger
2. Impersonal Accounts
• Real Accounts – Possessions of the business. Buildings, machinery,
equipment, fixtures and fittings, stock etc.
• Nominal Accounts – Expenses and income are recorded – sales, purchases,
wages, electricity, commission received etc.
Types of Accounts
The five Accounts types are:-
1. Assets – Objects or entities whether tangible or intangible owned by the
company which have economic value.
• Tangible Assets are physical items that the business owns such as land buildings,
vehicles, etc.
• Intangible Assets are items of value to the business such as Accounts receivable,
patents, contracts, software, goodwill, certificates of deposit(CDs)
• Current Assets – Items that can be consumed or converted to cash in the
accounting cycle (usually twelve months)
• Fixed Assets are expected to have a life span of more than one accounting cycle.
These are not very liquid and because of their high costs are depreciated and not
expensed out in the current accounts cycle
Types of Accounts
2. Liabilities – The obligations / debt owed by the business to others.
These can be:-
• Current Liabilities which are debts that are expected to be repaid within the
current accounting cycle or twelve months. These are usually satisfied with
current assets.
The difference between the company’s current Assets and Current liabilities
equals it working capital. Managing short term debt and having adequate
working capital is vital to a company’s long-term success.
• Long-term liabilities are debts of the company that will not be paid off in the
current accounting cycle and will last for years such as mortgages and long
term loans to purchase fixed assets.
Types of Accounts
3. Equity / Capital – Stockholder’s equity or capital is the owners’
financial share of the company. It is the portion of the assets of the
company that the owner possesses.
It comprises of several accounts, three of which are:-
• Capital – the owners personal money placed into the business
• Dividends / Drawings – The portion of the profits that is given to the
shareholder as dividends, while drawings is what is taken by the owner from a
sole trader business.
• Retained earnings – the amount of net profits that is re-invested into the
business for companies, or net profits for sole traders.
Types of Accounts
4. Income – The money that the business earns from conducting its
business, whether it is selling a product or service, receipt of interest
and dividends from marketable securities etc. This is also called
revenue, gross income, turnover and the ‘top line’
• Revenue less expenses equals net income. This is also called net profit, profit
or the ‘bottom line’
5. Expenses – Expenditure incurred in the operation of the business/
creation of profit.
• These are utilities, office supplies, rent, entertainment, travel etc.
• Depreciation Account is an expense account used when purchasing fixed
asstes
The Accounting Equation
• Accounting is based on the accounting equation, and is expressed
within the balance sheet (must be balanced).
Resources in the business = Resources Supplied by the owner + Resources
Supplied by Others

This is formally

Assets = Capital / Equity + Liabilities

•
Accounting
• Further learning:-

https://www.edx.org/course/accounting-essentials

https://www.edx.org/course/usmx-financial-accounting

https://www.edx.org/micromasters/iux-accounting