-Accounting is defined as the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof. (AICPA)
1. Identify the transaction from source documents.
2. Record the transaction as a journal entry.
3. Post the entry to the individual accounts in ledgers.
4. At the end of the reporting period, create a draft trial balance of all the accounts by netting all the debits and credits in each account to calculate their balances. The two columns should be equal.
5. Make additional adjusting entries that are not generated through specific source documents. For example, depreciation expense is periodically recorded for items like equipment to account for the use of the asset and the loss of its value over time.
6. Create an adjusted trial balance of the accounts. The left-side and right-side entries (debits and credits) must have the total same amount. Combine the sums in the various accounts and present them in financial statements created for both internal and external use.
7. Close the books for the current month by recording the necessary reversing entries to start fresh in the new period.
• Source document is a document which collected all the data. Source document is very important for the bookkeeping and accounting because it’s refers as a proof and for references to the accountant. Every business must kept their source documents as a proof that we’ve made which prevent from the trap and cheat in the future.
There are some examples of the source documents:
1. Receipt is to admit money has been collected.
2. Invoice is to inform to the customer the amount they had to pay, amount of discount given, whether in the cash term or credit term and interest charges for the late payment.
3. Credit note is to make a subtraction an amount which overcharged in the invoice and returns of goods from customer.
4. Debit note is to add the amount in the invoice for any additional charges such as transport fee, interest and etc.
5. Cash bill is same as invoice but just use in the cash transaction or cheque.
6. Payment voucher is to record the amount which paid from the customer in the cash term or cheque term.
7. Cheque counterfoil is to record the amount on a particular numbered cheque (the cheque counterfoil is on the portion left after tearing out the particular cheque)
8. Memo is a written message from the management to inform about the decision on certain transactions.
So, source document is very important to a business because it’s refers as an evidence, proof and for auditing propose.
DOUBLE ENTRY SYSTEM
– An accounting system of systematically recording both effects in every business transaction.
-The two effects of an accounting entry are known as Debit (Dr) and Credit (Cr).
ASSETS DEBIT CREDIT
LIABILITIES CREDIT DEBIT
EQUITY CREDIT DEBIT
PROFIT CREDIT DEBIT
LOSS DEBIT CREDIT
REVENUE CREDIT DEBIT
EXPENSES DEBIT CREDIT
1. When the business owner bought a machine with cash, it will cause the debit in the ASSETS (which machine increase) and credit in the ASSETS (the owner used her/his cash to buy the machine).
2. When the business owner invest a computer into her/his business, it will cause the debit in the ASSETS (which the computer increases) and credit in the EQUITY (which the capital increases).
USERS OF ACCOUNTING INFORMATION
• Accounting information helps users to make better financial decisions. Users of financial information may be both internal and external to the organization.
Internal users of accounting information include the following:
1. Management – Analyze the organization’s performance and position and taking appropriate measures to improve the company results.
2. Owners –Analyze the viability and profitability of their investment and determining any future course of action.
External users normally use only financial accounting information. External users of accounting information include the following:
1. Investors – Analyze the feasibility of investing in the company and provide capital and management to runs the business after they make sure they can earn a reasonable return on their investment.
2. Customers – Access the financial position of its suppliers to maintain a stable source of supply in the long term.
3. Government agencies – Use financial information of businesses for the purpose of imposing taxes and regulations.
4. Employees – Access the company’s profitability and its consequence on their future remuneration and job security.