COURSE 1

ACCOUNTING AND BOOKKEEPING WHAT IS ACCOUNTING? Accounting is the process of recording, classifying and summarizing financial information collected by bookkeepers for analysis and interpretation. It provides guidance in making business decisions and provides useful economic information to interested parties and users who depend on these results. WHAT IS BOOKKEEPING? Bookkeeping is the detailed and accurate recording of all transactions which take place in a business. It is necessary to record the date, nature and value (in money terms) of the transaction. Bookkeeping records provide the information from which financial accounts are prepared. Role of the bookkeeper Source documents arise as a result of transactions. It is the task of the bookkeeper to convert financial data gathered from source documents into useful economic information. This is done by: identifying source documents resulting from the transactions recording and summarizing details in journals classifying the information from the journals in the ledger. Once the information has been collected, recorded and arranged in a meaningful way by the bookkeeper, it is used by the accountant to prepare accounting reports. These reports assist management in planning for and controlling an organization and are also communicated to outside users such as shareholders and potential investors to assist with economic decision - making. Objectives of bookkeeping Bookkeeping is the process of maintaining a clear, concise and permanent record of all transactions as they occur, to assist the owner/s of the business to ascertain: amounts owing to the business by debtors amounts owed to creditors amounts of losses and gains in a particular accounting period and the reasons for these flow of cash and goods, both into and out of the business nature and amount of what the business owns or what is owed to the business (assets) nature and amount of what the business owes (liabilities) the amount of owners equity (capital, proprietorship) that the owner has invested in the business the overall financial standing of the business at a given date. FUNCTION OF ACCOUNTING People need economic information to help them taking decisions and judgments about businesses. Managers are interested in Accounting information. Accounting information should help them with their decisions. Accounting is concerned with the collection, analysis and communication of economic information. Accounting information is useful to those who need to make decisions and plans about business and for those who need to control those businesses. Managers working within a particular business are likely to be significant users of accounting information. But managers there are not the only people to use accounting information about that particular business. The fact is that accounting exists for some particular purposes, such as: to help users of accounting information make informed decisions; to prepare financial reports on a regular basis; to influence the decisions of users of the information produced. Accounting seeks to satisfy the needs of a wide range of users. In relation to a particular business, there may be various groups who are likely to have an interest in its financial health. C1

Accounting is concerned with the economic activities of a business. Accounting involves gathering information, processing it and reporting on it to management and other interested users. This information is used to evaluate past economic events, control current economic activities and make economic decisions and plans for the future. The Nature of Business Activity Financing Activities All businesses must start with financing. Simply put, money us needed to start a business. Accounting has its own unique set of treminology. In fact, accounting is often referred to as the language of business. The discussion of financing activities brings up two important accounting terms: liabilities and capital stock. A liability is an obligation of business; it can take many different forms. When a company borrows money at a bank, the liability is called a note payable. When a company sells bonds, the obligation is termed bonds payable. Amounts owed to the government for taxes are called taxes payable.When a business purchases goods or services on credit, the accounts payable account records these transactions. Capital stock is the term used by accountants to indicate the amount of stock sold to the public. Capital stock differs from liabilities in one very important aspect.those who buy stock in a corporation are not lnding money to the business, as are those who buy bonds in the company or make a loan in some other form to the company. Someone who buys stock in a company is called a sockholder, and that person is providing a permanent form of financing to the business. In other words, there is not a due date at which time the sockholder will be repaid. Normally, the only way for a sockholder to get back his or her original investment from buying stock is to sell it to someone else. Occasionally, a corporation buys back the stock of one of its stockholders. Someone who buys bonds in a company or in some other way makes a loan to it is called a creditor. A creditor does not provide a permanent form of financing to the business. That is, the creditor expects repayment of the amount loaned and, in many instances, payment of interest for the use of the money as well. Investing Activities There is a natural progression in a business from financing activities to investing activities. That is , once funds are generated from creditors and stockholders, money is available to invest. An asset is a future economic benefit to a business. For example, cash is an asset to a company. The finished products and the raw materials are called inventory and are another valuable asset of a company. An asset represents the right to receive some sort of benefit in the future. The point is that not all assets are tangible in nature, as are inventories and plant and equipment. For example, when a business sells goods or services on credit, the accounts receivable asset collect this transactions. As a second example, assume that a company acquires from an inventor a patent that will allow the company the exclusive right to manufacture a certain product. The right to the future economic benefits from the patent is an asset. In summary, an asset is a valuable resource to the company that controls it. Operating Activities Once funds are obtained from financing and investments are made in productive assets, a business is ready to begin operations. Every business is organized with a purpose in mind. The purpose of some business is to sell a product, other companies provide services or could sell both products and services. Accountants have a name for the sale of products and services. Revenue is the inflow of assets resulting from the sale of products and services. When a company makes a cash sale, the asset it receives is cash. When a sale is made on credit, the asset received is an account receivable. So, the revenue it represents the amount of sales of products and services for a specific period of time. Also, costs must be incurred to operate a business. Empoyees must be paid salaries and wages. Suppliers must be paid for purchases of inventory and the utility company has to be paid for heat and electricity. The government must be paid the taxes owed it. All of these are examples of important operating activities of a business. Accountants use a specific name for the costs incurred in operating a business. An expense is the outflow of assets resulting from the sale of goods and services.

C1 FINANCING ACTIVITIES Raising money to start

the business Money raised through financing is neede for investing Some profits are returned to creditors and owners while other profits are reinvested in productive assets OPERATING ACTIVITIES Generating revenues(and profits) via sales INVESTING ACTIVITIES Buying assets assets are used to generate revenues

The major user groups for a business organization, are the following:

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Customers O Owners Competitors

Managers Business Organisation Lenders

Employees and their representatives

Government

Suppliers Investment analysts

Community representatives

Accounting as an information system Accounting is an important part of the total information system within a business. Users, both inside and outside the business, have to make decisions concerning the allocation of scarce economic resources. To try to ensure that these resources are allocated in an efficient and effective manner, users require economic information on which to base decisions. It is the role of the accounting system to provide that information. The accounting system will involve the following procedures: identifying and capturing relevant economic information; recording the information collected in a systematic manner; analyzing and interpreting the information collected; reporting the information in a manner which suits the users needs.

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Information identification

Information recording

Information analysis

Information reporting

COMPANY CLIENTS SUPPLIERS

SHAREHOLDERS

STATE

EMPLOYEES

REAL FLOW FINANCIAL FLOW CAPITAL FLOW