Definition of Financial Accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting
of financial transactions pertaining to a business. This involves the
preparation of financial statements
available for public consumption. Stockholders, suppliers, banks,
employees, government agencies,
business owners, and other stakeholders are examples of people interested in
receiving such information for decision making purposes.
of financial transactions pertaining to a business. This involves the
preparation of financial statements
available for public consumption. Stockholders, suppliers, banks,
employees, government agencies,
business owners, and other stakeholders are examples of people interested in
receiving such information for decision making purposes.
Financial
accountancy is governed by both local and international accounting standards. GAAP (which stands for Generally Accepted Accounting Principles)
is the standard framework for guidelines for financial accounting used in any
given jurisdiction. It includes the standards, conventions and rules that
accountants follow in recording and summarising and in the preparation of
financial statements. On the other hand, IFRS (International
Financial Reporting Standards) is a set of international accounting
standards stating how particular types of transactions and other events should
be reported in financial statements. IFRS are issued by the International Accounting Standards (IASs). With IFRS becoming more
widespread on the international scene, consistency
in financial reporting has become more prevalent between global organisations.
accountancy is governed by both local and international accounting standards. GAAP (which stands for Generally Accepted Accounting Principles)
is the standard framework for guidelines for financial accounting used in any
given jurisdiction. It includes the standards, conventions and rules that
accountants follow in recording and summarising and in the preparation of
financial statements. On the other hand, IFRS (International
Financial Reporting Standards) is a set of international accounting
standards stating how particular types of transactions and other events should
be reported in financial statements. IFRS are issued by the International Accounting Standards (IASs). With IFRS becoming more
widespread on the international scene, consistency
in financial reporting has become more prevalent between global organisations.
How Financial Accounting
Helps Business Managers to Achieve Organizational Objectives
Helps Business Managers to Achieve Organizational Objectives
Financial
accounting helps business managers to achieve organizational objectives by
providing them with the following information:
accounting helps business managers to achieve organizational objectives by
providing them with the following information:
·
Systematic recording of
transactions: basic objective of accounting
is to systematically record the financial aspects of business transactions
(i.e. book-keeping). These recorded transactions are later on classified and
summarized logically for the preparation of financial statements and for their
analysis and interpretation.
Systematic recording of
transactions: basic objective of accounting
is to systematically record the financial aspects of business transactions
(i.e. book-keeping). These recorded transactions are later on classified and
summarized logically for the preparation of financial statements and for their
analysis and interpretation.
·
Ascertainment of result of
above recorded transactions:
accountant prepares profit and loss account to know the result of business
operations for a particular period of time. If expenses exceed revenue then it
is said that business running under loss. The profit and loss account helps the
management and different stakeholders in taking rational decisions. For
example, if business is not proved to be remunerative or profitable, the cause
of such a state of affair can be investigated by the management for taking
remedial steps.
Ascertainment of result of
above recorded transactions:
accountant prepares profit and loss account to know the result of business
operations for a particular period of time. If expenses exceed revenue then it
is said that business running under loss. The profit and loss account helps the
management and different stakeholders in taking rational decisions. For
example, if business is not proved to be remunerative or profitable, the cause
of such a state of affair can be investigated by the management for taking
remedial steps.
·
Ascertainment of the
financial position of business:
businessman is not only interested in knowing the result of the business in
terms of profits or loss for a particular period but is also anxious to know
that what he owes (liability) to the outsiders and what he owns (assets) on a
certain date. To know this, accountant prepares a financial position statement
of assets and liabilities of the business at a particular point of time and
helps in ascertaining the financial health of the business.
Ascertainment of the
financial position of business:
businessman is not only interested in knowing the result of the business in
terms of profits or loss for a particular period but is also anxious to know
that what he owes (liability) to the outsiders and what he owns (assets) on a
certain date. To know this, accountant prepares a financial position statement
of assets and liabilities of the business at a particular point of time and
helps in ascertaining the financial health of the business.
·
Providing information to
the users for rational decision-making:
accounting as a ‘language of business’ communicates the financial result of an
enterprise to various stakeholders by means of financial statements. Accounting
aims to meet the financial information needs of the decision-makers and helps
them in rational decision-making.
Providing information to
the users for rational decision-making:
accounting as a ‘language of business’ communicates the financial result of an
enterprise to various stakeholders by means of financial statements. Accounting
aims to meet the financial information needs of the decision-makers and helps
them in rational decision-making.
·
To know the solvency
position: by preparing the balance
sheet, management not only reveals what is owned and owed by the enterprise,
but also it gives the information regarding concern’s ability to meet its
liabilities in the short run (liquidity position) and also in the long-run (solvency
position) as and when they fall due.
To know the solvency
position: by preparing the balance
sheet, management not only reveals what is owned and owed by the enterprise,
but also it gives the information regarding concern’s ability to meet its
liabilities in the short run (liquidity position) and also in the long-run (solvency
position) as and when they fall due.
Definition of Book-keeping
Bookkeeping is the recording of financial transactions, and is
part of the process of accounting in business. Transactions include purchases, sales, receipts
and payments by an individual or organization. The accountant creates reports
from the recorded financial transactions recorded by the bookkeeper and files
forms with government agencies. There are some common methods of bookkeeping
such as the single-entry
bookkeeping system and the double-entry
bookkeeping system. But while these systems may be seen as
“real” bookkeeping, any process that involves the recording of financial
transactions is a bookkeeping process.
part of the process of accounting in business. Transactions include purchases, sales, receipts
and payments by an individual or organization. The accountant creates reports
from the recorded financial transactions recorded by the bookkeeper and files
forms with government agencies. There are some common methods of bookkeeping
such as the single-entry
bookkeeping system and the double-entry
bookkeeping system. But while these systems may be seen 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 an organization. A bookkeeper is usually responsible for writing the
“daybooks”. The daybooks consist of purchases, sales, receipts, and
payments. The bookkeeper is responsible for ensuring all transactions are
recorded in the correct day book, suppliers ledger, customer ledger and general ledger.
is usually performed by a bookkeeper. A bookkeeper
(or book-keeper), is a person who records the day-to-day financial transactions
of an organization. A bookkeeper is usually responsible for writing the
“daybooks”. The daybooks consist of purchases, sales, receipts, and
payments. The bookkeeper is responsible for ensuring all transactions are
recorded in the correct day book, suppliers ledger, customer ledger and general ledger.
The
bookkeeper brings the books to the trial balance stage. An accountant
may prepare the income statement and balance sheet using the trial
balance and ledgers prepared by the bookkeeper.
bookkeeper brings the books to the trial balance stage. An accountant
may prepare the income statement and balance sheet using the trial
balance and ledgers prepared by the bookkeeper.
The
bookkeeping process primarily records the financial effects of transactions
only. The variation between manual and any electronic accounting system stems
from the latency
between the recording of the financial transaction and its posting in the
relevant account. This delay, although absent in electronic accounting systems
due to instantaneous posting into relevant accounts, is a basic characteristic
of manual systems, thus giving rise to primary books of accounts such as Cash
Book, Bank Book, Purchase Book, and Sales Book for manually recording the
immediate effect of the financial transaction.
bookkeeping process primarily records the financial effects of transactions
only. The variation between manual and any electronic accounting system stems
from the latency
between the recording of the financial transaction and its posting in the
relevant account. This delay, although absent in electronic accounting systems
due to instantaneous posting into relevant accounts, is a basic characteristic
of manual systems, thus giving rise to primary books of accounts such as Cash
Book, Bank Book, Purchase Book, and Sales Book for manually recording the
immediate effect of the financial transaction.
In
the normal course of business, a document is produced each time a transaction
occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements
(deposits) are made to a bank account. Checks are written
to pay money out of the account. Bookkeeping involves, first of all, recording
the details of all of these source
documents into multi-column journals
(also known as a books of first entry
or daybooks). For example, all
credit sales are recorded in the sales journal, all cash payments are recorded
in the cash payments journal. Each column in a journal normally corresponds to
an account. In the single entry system,
each transaction is recorded only once. Most individuals who balance their
check-book each month are using such a system, and most personal finance
software follows this approach.
the normal course of business, a document is produced each time a transaction
occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements
(deposits) are made to a bank account. Checks are written
to pay money out of the account. Bookkeeping involves, first of all, recording
the details of all of these source
documents into multi-column journals
(also known as a books of first entry
or daybooks). For example, all
credit sales are recorded in the sales journal, all cash payments are recorded
in the cash payments journal. Each column in a journal normally corresponds to
an account. In the single entry system,
each transaction is recorded only once. Most individuals who balance their
check-book each month are using such a system, and most personal finance
software follows this approach.
After
a certain period, typically a month, the columns in each journal are each totaled to give a summary for the period.
Using the rules of double entry, these journal summaries are then transferred
to their respective accounts in the ledger,
or account book. For example
the entries in the Sales Journal are taken and a debit entry is made in each
customer’s account (showing that the customer now owes us money) and a credit
entry might be made in the account for “Sale of class 2 widgets”
(showing that this activity has generated revenue for us). This process of transferring
summaries or individual transactions to the ledger is called posting. Once the posting process is
complete, accounts kept using the “T” format undergo balancing, which
is simply a process to arrive at the balance of the account.
a certain period, typically a month, the columns in each journal are each totaled to give a summary for the period.
Using the rules of double entry, these journal summaries are then transferred
to their respective accounts in the ledger,
or account book. For example
the entries in the Sales Journal are taken and a debit entry is made in each
customer’s account (showing that the customer now owes us money) and a credit
entry might be made in the account for “Sale of class 2 widgets”
(showing that this activity has generated revenue for us). This process of transferring
summaries or individual transactions to the ledger is called posting. Once the posting process is
complete, accounts kept using the “T” format undergo balancing, which
is simply a process to arrive at the balance of the account.
As
a partial check that the posting process was done correctly, a working document
called an unadjusted trial balance
is created. In its simplest form, this is a three column list. The first column
contains the names of those accounts in the ledger
which have a non-zero balance. If an account has a debit balance, the balance
amount is copied into column two (the debit column). If an account has a credit
balance, the amount is copied into column three (the credit column). The debit
column is then totalled and then the credit column is totalled. The two totals
must agree – this agreement is not by chance – because under the double-entry
rules, whenever there is a posting, the debits of the posting equal the credits
of the posting. If the two totals do not agree, an error has been made either
in the journals or during the posting process. The error must be located and
rectified and the totals of debit column and credit column recalculated to
check for agreement before any further processing can take place.
a partial check that the posting process was done correctly, a working document
called an unadjusted trial balance
is created. In its simplest form, this is a three column list. The first column
contains the names of those accounts in the ledger
which have a non-zero balance. If an account has a debit balance, the balance
amount is copied into column two (the debit column). If an account has a credit
balance, the amount is copied into column three (the credit column). The debit
column is then totalled and then the credit column is totalled. The two totals
must agree – this agreement is not by chance – because under the double-entry
rules, whenever there is a posting, the debits of the posting equal the credits
of the posting. If the two totals do not agree, an error has been made either
in the journals or during the posting process. The error must be located and
rectified and the totals of debit column and credit column recalculated to
check for agreement before any further processing can take place.
Once
the accounts balance, the accountant makes a number of adjustments and changes
the balance amounts of some of the accounts. These adjustments must still obey
the double-entry rule. For example, the “inventory”
account asset account might be changed to bring them into line with the actual
numbers counted during a stock take. At the same time, the expense account
associated with usage of inventory is adjusted by an equal and opposite amount.
Other adjustments such as posting depreciation and prepayments are
also done at this time. This results in a listing called the adjusted trial balance. It is the
accounts in this list and their corresponding debit or credit balances that are
used to prepare the financial statements.
the accounts balance, the accountant makes a number of adjustments and changes
the balance amounts of some of the accounts. These adjustments must still obey
the double-entry rule. For example, the “inventory”
account asset account might be changed to bring them into line with the actual
numbers counted during a stock take. At the same time, the expense account
associated with usage of inventory is adjusted by an equal and opposite amount.
Other adjustments such as posting depreciation and prepayments are
also done at this time. This results in a listing called the adjusted trial balance. It is the
accounts in this list and their corresponding debit or credit balances that are
used to prepare the financial statements.
How Bookkeeping Helps
Business Managers to Achieve Organizational Objectives
Business Managers to Achieve Organizational Objectives
Book-keeping
helps business managers to achieve organizational objectives in the following
ways:
helps business managers to achieve organizational objectives in the following
ways:
·
Accurate bookkeeping is a necessity for each and
every business that has a vision to grow or stand out in the competitive
market. Many businesses which would otherwise have been successful have been brought
down by their failure to maintain proper financial records. Whether you like it
or not bookkeeping is very essential in a business.
Accurate bookkeeping is a necessity for each and
every business that has a vision to grow or stand out in the competitive
market. Many businesses which would otherwise have been successful have been brought
down by their failure to maintain proper financial records. Whether you like it
or not bookkeeping is very essential in a business.
·
Proper track of cash flow is critically important
for any business and it’s only possible if you have accurate financial records.
Many businesses that were seemingly profitable and growing have failed after
being hit by unexpected cash flow.
Proper track of cash flow is critically important
for any business and it’s only possible if you have accurate financial records.
Many businesses that were seemingly profitable and growing have failed after
being hit by unexpected cash flow.
·
Expenses should always be paid for directly from
the business bank account and should ideally be submitted on a monthly or
quarterly basis. This ensures that the person doing the bookkeeping has an
understanding of outgoings and can monitor them for tax and accounting
purposes. Proper book keeping will help a business identify where there is over
spending and eventually lead to a reduction.
Expenses should always be paid for directly from
the business bank account and should ideally be submitted on a monthly or
quarterly basis. This ensures that the person doing the bookkeeping has an
understanding of outgoings and can monitor them for tax and accounting
purposes. Proper book keeping will help a business identify where there is over
spending and eventually lead to a reduction.
·
Accurate book keeping allows you to see whether or
not your business is actually making a profit. It is surprising how often
business owners fail to keep track of this but it is obviously extremely
important. As much as the business might appear to be doing well in terms
of cash flow if not well monitored it could be over spending the money.
Accurate book keeping allows you to see whether or
not your business is actually making a profit. It is surprising how often
business owners fail to keep track of this but it is obviously extremely
important. As much as the business might appear to be doing well in terms
of cash flow if not well monitored it could be over spending the money.
·
Bookkeeping always helps a business owner to have a
greater understanding of how much progress the business has made. You can look
back and see patterns and draw comparisons with previous business years. This
can provide a greater understanding of the areas within the business which make
a profit and where costs might be trimmed. This kind of financial analysis can
help you to avoid problems in the future.
Bookkeeping always helps a business owner to have a
greater understanding of how much progress the business has made. You can look
back and see patterns and draw comparisons with previous business years. This
can provide a greater understanding of the areas within the business which make
a profit and where costs might be trimmed. This kind of financial analysis can
help you to avoid problems in the future.
·
Bookkeeping may seem a burden when you are trying
to grow your business but it is essential if you are to not only survive but
also prosper in today’s tough economic climate. Many business that were well
doing have ended closing down due to poor book keeping. In a business the more
you earn and the lesser you spend the stronger you become.
Bookkeeping may seem a burden when you are trying
to grow your business but it is essential if you are to not only survive but
also prosper in today’s tough economic climate. Many business that were well
doing have ended closing down due to poor book keeping. In a business the more
you earn and the lesser you spend the stronger you become.
·
A proper bookkeeping system is essential to any
business whether big or small in order to manage its daily functions and keeps
the business running successfully. For any successful business, the main
obligation is to maximize profits, minimize any loss and at the same time
maintain its position as a responsible entity within the society. A business
that does not have a proper bookkeeping system is like a blind folded driver who
can easily cause an accident.
A proper bookkeeping system is essential to any
business whether big or small in order to manage its daily functions and keeps
the business running successfully. For any successful business, the main
obligation is to maximize profits, minimize any loss and at the same time
maintain its position as a responsible entity within the society. A business
that does not have a proper bookkeeping system is like a blind folded driver who
can easily cause an accident.
References
Chew, L. & Parkinson, A.
(2013). Making Sense of Accounting for Business. Harlow: Pearson
(2013). Making Sense of Accounting for Business. Harlow: Pearson
Ikpefan, O. & Akande, A.
(2012). “International Financial Reporting Standard (IFRS)
Benefits, Obstacles and Intrigues for Implementation in Nigeria”. Business
Intelligence Journal, Vol 5, Iss 2, Pp 299-307.
(2012). “International Financial Reporting Standard (IFRS)
Benefits, Obstacles and Intrigues for Implementation in Nigeria”. Business
Intelligence Journal, Vol 5, Iss 2, Pp 299-307.
Marsden,S. (2008). Australian
Master Bookkeepers Guide. Sydney: CCH
Master Bookkeepers Guide. Sydney: CCH
