INTRODUCTION We all should learn about the basic accounting knowledge
We all should learn about the basic accounting knowledge. In my opinion, accounting is very essential not only in business but also useful in our daily routine. In business, Hillegass (2012) showed that it is a systematic process of recording, summarising and analysing an economic entity’s financial transactions. Accounting make the business transactions can carry out in an effective and efficient way. In this assignment, we can more understand about the accounting process, source documents, double entry system and users of accounting information. We must follow the accounting process when recording the business transactions. Source documents are important as evidence of transactions of the business. By collecting and recording all the documents, accountant will using the double entry system to prepare the 7 Books of Prime Entry. After preparing the ; Books of Prime Entry, the 3 Ledgers will be prepared. Draft Trial Balance ; Financial Statements will be prepared once the 3 ledgers prepared. Adjustment will be doing to make sure the accurate of the financial report. After adjustment, adjusted Trial Balance ; Financial Statement will be prepared. The last step is closing entries which include the closing off general ledger accounts and balancing off general ledger accounts. All these steps will be repeated in the next accounting period. Besides, bookkeeping is also a part of accounting process. Bookkeeping is the process of collecting and recording the business transaction which is the day-to-day transaction made.The purpose of accounting is to prepare the information to different users so that they can make decisions correctly. The purpose of bookkeeping is to make sure all the daily business transaction have recorded and simplify the following steps. The financial statement is prepared and the users of accounting information can know the performance of the company such as profit earned in the accounting period and the assests, liabilities and equity in the business. The company’s leader must thoroughly understand the accounting in order to help the company to earn money.
Schmidt(n.d) states that accounting process as a series of actions or steps taken in order that consists of collecting, recording, summarising and communicating according to the business accounts and account entries. The accounting process always starts with collecting source documents from the business and ends when the business accounts is closed temporary before the coming of next new period of accounting. According to Wood and Sangster(2005, p. 5), the main objective of accounting is to supply the analysis of financial for making choice for the business. Besides that, also let the outsiders to get the information about how much the business have owed and the profit or loss that business made.
First, the process starts with collecting. A document is create when there is a business transaction and this document is defined as a source document.(QuickMBA n.d) The process of collecting source documents is very important to make an account as the source document contained the details of every daily transaction of a business. For examples, purchases goods from suppliers, sells products to customer, loan from bank, paid shop rental and electricity bills are the transaction that need to collect as the source document of the business.
Next, the process continues with recording. The source documents that have been collected need to record into the 7 books of prime entry using the double-entry system. The 7 books of prime entry are cash book, petty cash book, sales journal, purchases journal, returns inwards, return outwards and general journal. When there is a people who wants to know the information of the accounting, they cannot recall the information and they will make reference to the accounting and this make them always have to record it.(Wood & Sangster 2005, p. 6) Other than this, the recording details also helps to minimise the details that need to contain in the ledger books. For instance, when the company purchase goods from supplier on credit term and the invoice is received, the accountant need to record the transaction into credit side of trade payable account and debit side of purchases account. The example that given above showed the method of using double entry system which will discuss in the other topic.
After recording the details from the source document, the next process is summarising. The accounting information need to summarise from the books of prime entry. The purpose of this process is to enable the information to become more useful and can be seen clearly in every accounts. When the information is summarised, those transaction is transferring to the ledger books. There are 3 types of ledgers: general ledger, sales ledger and purchases ledger. The ledger is a group of “T” accounts which present the total balances of the financial statements.(Accounting Verse, n.d) The total amount on the debit side and credit side of every account which also known as the Trial Balance should be the same which shows the completeness of the double entry system of the business account.
Lastly, communicating is the last process of the accounting. Before communicate with the users, the financial statements need to prepare. Wood and Sangster (2005, p.98) states that the financial statements is the specific period that the accountants need to find out the end of the statements before starting the next stage of account. This statement contain all the assets, liabilities and the equity of owner to find out the net income or net loss of the business. According to the accounting equation, assets will always equal to the liabilities and equity and show the statement is balance. After that, an adjustment need to be made in the end of every ledgers so that every ledgers can balance up to the date. When the adjustment is made, this can also show the loyalty and equitable of the accounts. For example, the rental of RM36,000 that was paid is for the months of January, February and March. To adjust this statement, the rental of RM36,000 need to divide by 3 so the rental for a month can be counted and recorded.(Irfanullah Jan, n.d) Finally, the entries can be closing in the proper way and the accountant can started to communicate with the business owner. The results of the business such as is the business doing successfully with the financial statements, the intensity or weak point of the business and every statement of the business should be inform to the owner and the users of accounting as the result is important.(Wood & Sangster 2005, p. 6)
Source documents are use as evidence when a auditor or accountant preparing the financial statement. Source documents are also needed to record all the business transactions for further accounting process.Besides, source documents are important to calculate the business or company’s profit or loss. Besides, source documents are required to satisfying the law of tax in our country. Source ducuments are important to known as a proof that the accuracy of the income in the business or company. The table below are the example and the explanation of the source documents. ( BusinessDictionery,com n.d. )
Invoice Document used to record the amount to be paid by customers when selling goods in credit term and receive when purchases goods in credit term.
Cash bill Record the transaction which is on cash term.
Payment Voucher Used as a proof when a monetary transaction occurred.
Official Receipt Document that verify the goods have been received and paid.
Credit Note A document that issued by a seller to buyer to correct mistake such as amount in invoice have overchanged or return the goods that are spoiled.
Debit Note Document that issued by a seller to buyer for additional charges such as transportation fee.
Cheque Counterfoil Document that keep after issued a cheque as a evidence.
Memo A short message sent from management or boss to convey decision on certain transactions or issued cheque.
Double Entry System
Double Entry System is a method for keeping financial record, invented by Luca Pacioli, in 1494. Double Entry System will record every transaction into at least two accounts . Each transaction affects two accounts at the same time, when one account is debited while the other is credited. (Surbhi 2015)
Function of Double Entry System
The function of double-entry accounting is to record all of the financial transaction records so when the financial statements and reports are run, the company’s assets are equal to its liabilities and equity (assets = liabilities + Equity ) (Lahle 2018)
Example of Double Entry System
For an example, when Company Low Glove borrows money from the Bank A, the Low Glove company’s Cash account will increase and its liability account for Loans Payable will increase. If company Low Glove pays $400 for an furniture, its Cash account will decrease and its account furniture expense will increase. In this example, the assets cash has decreased and Low Glove company’s capital account also decreased and double entry system allow the account equation remain balance (assets = liabilitie + equity)
Advantages of double entry system
Under this method every transaction and each aspects are recorded accordingly.
Able to verify arithmetical accuracy of the books of accounts by trial balance
Able to detect and prevent frauds and mistakes
allows companies to accurately assess the profit or loss by preparing profit and loss account
Disadvantages of double entry system
This system is complex and there is greater possibility of committing errors and mistake
Significant amount of time,labor and money is required to spent on ecording and maintaining double-entry books
It requires expert knowledge to keep accounts under this system
No accuracy before making of trial balance as you cannot check the accuracy of?journal?before making of trial balance
Users of accounting information.
Accounting information such as Statement of Financial and Statement of Profit or Loss are necessary to be prepared. These information will be presented to the users to make a lot of decisions. Accounting information that prepared can help the users make a correct decision that make the company or business make profit. The users of accounting information have divided to two categories which are internal users and external users.
Accounting-Simplified ( 2010 ) mentions that internal users of accounting information are :
Management. The management will need the accounting information to make decision, planning and controlling the business activities daily. For example, manager of a company need the accounting information to make sure the decision made is gaining profit.
Owner of the business. The owner of business need the accounting information to make sure the company or business is profitable and do not make loss. The owner of business will also need the accounting information to know their assests and liabilities of the business.
Employees. The employees of a business or company will need the accounting information to know whether the company can protect them from umemployment and the chances of career growth.
Frank and Alan (2008 , p.7 ) stated that external users of accounting information are :
Investors and potential investors. Due to they did not work day by day in the company or business, so they will use the financial statements to know whether or not to invest their money in the company or business.
The bank. Bank use the accounting statements to define the amount to owe to the business or company. Bank also use the accounting information to identify the ability of the business or company to pay back their debts.
Government. Government use the accounting information to calculate tax payable and the amount of gross domestic product in the country.
Customers. Based on the accounting information, customers might know whether or not the company or business can continued supply the product.
We are student from Diploma in Finance and Investment, Accounting has taught us about the basic on how a business works financially. This is the most fundamental things that can use to interpret the financial condition of a firm and take decision whether to invest or not. We are glad that TAR UC do put this subject into this course and we will be able to make the right and appropriate decision in investment more accurately in the future time, and bring benefits to not only the firm but also for ourselves. The ability of us to be able to determine the assets’ value, understand company’s financing sources, make correct decision before invest our customers’ money in the particular company, calculate the profit that company earn and estimate risk of a company which they will face are things that we have mastered from this subject. We are feeling very happy that we do take this subject.