Accounting vs Bookkeeping

Accounting: may be defined as “the systematic recording, analyzing,

classification, interpretation, summarizing and reporting of financial
information so that users can make wise economic decisions”.
Bookkeeping: is the recording of financial information

Methods of Accounting
Cash Basis: As per cash basis of accounting, we record revenues on
receipt of cash, and expenses when payment is made. The cash method
also helps to determine how much cash the business actually has at any
given time. Typically used by small businesses. E.g. farmers, doctors,
small grocery shops.
Accrual Basis: Record revenues and expenses when they accrue,
regardless of the actual receipt or payment of the amount. This basis is
more commonly in use than the cash basis. The accrual basis provides a
more realistic idea of income and expenses during a period of time. This
method provides a long-term picture of the business that cash accounting
cannot provide.
 THE USE OF COMPUTERS
IN ACCOUNTING
Technological advances can change the way businesses operate,
including the way accounting is handled. Computerized accounting
systems streamline the accounting process while efficiently storing
financial information for a company. Despite the benefits, technology in
accounting has limitations and downfalls that can negatively impact
business. An awareness of those issues allows you to address them
before they become major problems.
Security
The security of the accounting information in a computerized program is
limited to the quality of the program itself and your company; security
system. A poorly protected program and database leaves an opening for
hackers or unauthorized personnel to access all of your company
financial information. This information may be used for malicious
purposes that could hurt your company or your employees if their
personal financial information is accessed. To avoid security problems,
work with your technology specialists to develop a security system that
protects your accounting information from both external hackers and
unauthorized internal access. This typically includes a firewall to stop
hackers and password protection for internal access restriction.
Automation Limitations
Technology allows for automation of accounting by transferring data to
multiple reports and systems. The systems have the capability of
automatically sending payments or invoices. While the automation saves
time, it can also create problems if information is entered incorrectly.
The automatic transfer of those numbers could mean errors down the
line in various reports and other items generated by the system. Bugs in
the software are also a potential problem that can cause incorrect
information or calculations. Explore different accounting systems before
committing to one to ensure you are able to maintain the type of control
you want.
Changing Technology
Because technology rapidly changes, computerized accounting systems
may become outdated over time. The functionality of an older system is
limited compared to updated software. This means you either continue
operating on the system with fewer functions or spend the money to
upgrade to a different version or system. If you switch to a completely
different accounting system, transferring the old data from the previous
system can sometimes be complicated.
Training
A software program still requires knowledgeable staff members to use it
in order for it to be effective. No matter how easy the accounting
software is to use, limitations still exist based on how well-trained the
staff is and how confident they are in using the software. User error is a
potential problem that could create incorrect accounting data for the
company. To avoid this, ensure all accounting staff members are fully
trained on the program. Hold special training sessions if the program
changes or is updated to a new version, so that all staff members are
aware of the new features.

What are ethics in

accounting?
Ethics in accounting are concerned with how to make good and moral
choices in regard to the preparation, presentation and disclosure of
financial information.
Ethical Principles
 FOOD FOR THOUGHT -
ETHICAL-decision making
isn’t always cut and dried.
What would you do in each of the following scenarios?
 When a subpoena arrives requesting a client’s personal financial
records, should you surrender them?
 The CEO tells your staff member to apply a credit from an
overpayment on one account to a disputed account, should you
allow it?
 If a sale at year-end occurs but is not executed before the cut-off
date, should the revenue be recorded in the current or prior year?
What if the goods were in transit? What if there was an oral
agreement but not a signed contract?
 If your boss, another CPA, instructs you to record the transaction
in the earlier year, what should you do?

Why Managers Need

Accounting Information
Financial Planning: Financial planning involves the preparation of
budgets that anticipate future income and expenses of the business.
Management requires a range of accounting information to prepare
budgets and forecasts. For example, budgeting the production cost in the
following year requires the knowledge of:
 What are the projected sales for next year?
 How many units of inventory from this year will carry forward to
meet next year’s sales demand?
  What production constraints can limit production?
 How many units need to be manufactured in the following year?
 What is the cost of production in the current year?
 What is the proportion of production cost that is fixed?
 What is the expected rate of inflation?
 Without relevant and reliable accounting information, managers
will be unable to perform effective financial planning.
Monitoring & Control: Managers need up to date accounting
information to monitor and control the financial health of a business.
For an effective oversight of the financial matters, management seeks
regular reporting of critical financial activities as well as any significant
deviations from the financial plan. Examples of accounting information
that facilitates management oversight include:
 Monthly sales report detailing the sales revenue earned from
different geographical segments, products, and services.
 Variance analysis reports that compare budgeted and actual
spending.
 List of significant expenditures incurred during an accounting
period.
 Product-wise and location-based profitability reports.
Decision-Making: Management relies on accounting information for
decision-making. For example, decisions to invest in a new product, or
building a new production facility, or shutting down a product line, are
all preceded by careful financial analysis that is grounded in accounting
information. Without reliable accounting data, management cannot
accurately estimate the relevant cost and benefit of business decisions.
 A balance sheet is a financial statement which shows the financial
position of a business at a particular date. In other words, the balance
sheet outlines what is “owned” and what is “owed” by a business.

How to Construct a
Balance Sheet (Horizontal
Format)

The Accounting Equation

This represents the relationship between assets, liabilities and
equity of any business. It is also known as The Balance Sheet equation.

Balance Sheet
Assets : These are resources with a monetary value
that are owned by a business.
Non-Current (Fixed) Assets Current Assets
These are the assets which the These are assets which are
business intends to keep and make frequently changing in value; they
use of for a long time. can be quickly be converted into
cash and benefit the business for a
short period of time.
Examples of Non- Current Assets: Examples of Current Assets:
Premises, machinery, equipment, Cash in hand, Cash at bank,
fixtures and fittings, furniture, accounts receivables (debtors),
vehicles inventory (stock), prepaid
expenses, Revenues accrued
(owing).

Liability : This is the amount owing by the

business to other businesses, organizations
or individuals.
 Examples
Non-Current (Long-term) Liabilities
These are amounts due which are
likely to be repaid in a future
financial period (after more than one
(1) year.
Current Liabilities
These are amounts due which
are likely to be repaid in a future
financial period (less than one
(1) year.

Examples of Non-Current Liabilities Examples of Current Liabilities

Loan amounts owing for more than Bank overdraft
12 months Accounts payable (creditors)
Mortgages Expenses accrued (owing)
Revenues prepaid

This is the investment made by the

Equit owner(s) of a business. It is the same as saying
the “net value” of a business.
Order ofy:Permanence Order of Liquidity
Arrangement
This is the sequence used to list
items on a balance sheet in a
of Balance
This is the sequence used to list
items on a balance sheet in an

items which are likelySheet items

descending order. It begins with ascending order. It begins with
to be items which are least likely to be
longest lasting and ending with longest lasting and ending with
items that are likely to be the items that are likely to be the
shortest lasting (easiest to convert longest lasting (harder to convert
to cash). to cash).
Liability Capital Formula
A=C+L Assets
$2,500.00 $4,000.00 =   $ 6,500.00

Asset Capital Formula

L=A-C Liabilities
$14,500.00 $4,000.00 = $ 10,500.00

Assets Liabilities Formula

C=A-L Capital
$23,600 $6,000 = $ 17,600

N.B. Whenever the user withdraws asset from the business for
private use, we called it drawings.
 THE ACCOUNTING
CYCLE

This is
a multi-
step process
of

recording and processing all business transactions of a company and

converting them into useful financial statements.
Step 1 - Source Documents
These are an integral part of the accounting process as they provide evidence of all
transactions occurred. They can be physical or electronic. They usually contain the
following information:
 A reference numbers
 A description of the business transaction
 The date of the transaction
 The quantity and price per item
 The specific amount of money
 An authorizing signature.
Examples of Source Documents...
 Cash receipts - the proof of purchase issued when the buyer has paid in cash.
 Invoices - a document prepared by the seller when they sell goods or provide
services on credit. In the seller’s record, the invoice is a sales invoice and in
the purchaser’s record the invoice is a purchases invoice.
 Credit note - a document raised by the supplier when goods have been
returned by the purchaser due to damage, faulty, overcharge made on
invoice. They are sometimes printed in red.
 Debit note - If the supplier agrees, goods bought previously may be returned.
When this happens, the purchaser creates and send the debit note to the
supplier giving reason for the return. This document shows that the
purchaser expects the seller to bear the charge.
 Bank paying-in slip (Deposit slips) - Used for paying money into a bank
account.
 Petty cash voucher - a form used by anyone requesting payment for a small
item of expenditure incurred on behalf of the business.
Examples of Source Documents...
 Cash register tapes or till rolls - used as evidence of cash sales.
  Cheque counterfoil or cheque stub - used to show evidence of cheques
written.
 Bank Statements - issued by the bank to show evidence of all transactions
related to the business’ bank account.
 Time card. - this supports the issuance of a paycheck or electronic payment
to an employee
 Purchase order - a document created by a buyer, indicating the items they
wish to purchase from a seller.
Step 2 - Books of Original Entry
These are the books in which all transactions are first recorded, using the
evidence provided on source documents.
 The Journal
 The Sales Journal - Used to record credit sales. Also called Sales Day Book.
 The Purchases Journal Purchases (Purchases Day Book) - records credit
purchases.
 Returns Outwards Journal (Purchases returns book) - used to record goods
returned to the supplier. Source doc: debit note
 Returns Inwards Journal (Sales returns book) - records returns by customers.
Source doc: credit note
 Cash book - records all cash and bank receipts and payments.
 Petty cash book - used to record small (petty) cash payments.
Step 3 - Ledgers
These are books which contains accounts in which the classified and summarized
information from the journals is posted as debits and credits.
Sales Ledger Purchases Ledger General Ledger Cash Book
Debtors’ Ledger - Creditors’ Ledger Nominal Ledger
Accounts - Accounts
Receivable Payable
Shows record of Shows record of Contains the Cash and bank
customers suppliers’ remaining double payments and
personal accounts personal accounts entry accounts receipts
such as income,
expenses, assets
and capital
Step 4 - Trial Balance
This is a list of all the balances from the ledger accounts and it is used to check the
arithmetical accuracy of the double entry records.
NB: There are some transactions which occur after the trial balance has been
prepared. The adjustments are made then used to prepare financial statements.
Step 5 - Final Accounts
For the Sole Trader, the final accounts prepared are:
1. The Profit and Loss Account (Income Statement) - which shows any loss or
profit made for the period.
2. The Statement of Financial Position (Balance Sheet)

SOURCE DOCUMENT
The
aim of any business is to make a profit and this is achieved by the
trading goods and services. When a business makes a sale of goods or
provide a service to its customers then it will use a number different of
documents which use to enter the sale into the books of the account.
Since any transactions involve both the seller and the buyer, the
documents are use by both parties, for example the invoice is regard as a
‘sale invoice’ for the seller but a ‘purchase invoice’ for the buyer.
Let us consider the documents use in the selling and buying process:
Purchase requisition: In a large organization, this is sent by the
department manager to the purchasing department requesting the items
to be purchase.
Purchase order: a customer or purchasing department of a large
organization will decide what goods or services they require and issue a
‘purchase order’ to the supplier.
Delivery note: the supplier subsequently delivers the goods accompanied
by a ‘delivery note’. This document contains details of the goods being
delivered upon which the customer will sign for their receipt.
Invoice: the supplier then sends an ‘invoice’ the buyer detailing the
goods or services supplied and the amount due for payment.
Debit note or return note: Should any goods be faulty or unsatisfactory
the buyer will return them to the supplier together with a ‘debit note’
requesting an allowance in respect of the goods return.
Credit note: Upon receipt of the faulty goods and ‘debit note’ the
supplier issues a ‘credit note’ indicating the amount of
refund/allowances due to the buyer.
Statement of account: At the end of the month the supplier issues a
‘statement’ to the buyer showing an opening balance then listing the
invoices and credit notes issued and any payment received and the
amount due.
Remittance advice: any payment made should be accompanied by a
‘remittance advice’ detailing the invoices, credit notes making up the
payment.
Receipt: When goods are purchased and paid for immediately by cash
then a receipt is issued, usually via a cash-till-generated document. A
hand-written receipt may also be given.
The flow of documents
Purchaser Seller
A transaction is a completed agreement between a buyer and a seller to
exchange goods and services.

An account is the systematic presentation of all the transactions

Debit Side
The Double Entry System of bookkeeping refers to process whereby
every entry in an account requires a corresponding and opposite entry in
a different account.
In other words, Double Entry refers to the recording of one transaction
on the debit side of one account and the credit side of another account.
Rules of Double Entry