Hello [newsfield name=”name”],
Welcome to the first lesson in our 5 Day Grow Your Business with Accounting” Challenge. Over the next few days you will receive several lessons that will help you
learn the ins and outs of Accounting and what it can do for your business.
In this first lesson let’s talk a little about what Accounting is, how it
functions, so you can make the most out of your accounting
So let’s go and have a shot…
What is accounting?
“Accounting is a systematic process of collecting, classifying, recording, summarizing, reporting and interpreting financial transactions and statements. It reveals profit or loss for a given period, and the value and nature of firm’s assets, liabilities and owner’s equity.”
From this definition, accounting transactions pass through
- Collecting the data
- Classifying the data through analysis of transaction or transaction analysis
- Recording the data in the journals and the general ledger
- Summarizing the information on each account balance in the ledger to a Trial Balance
- Reporting through the preparation of financial statements: Income Statement, Financial Position, Cash Flow, Value Added Statement, Five Year Summary and Notes to the account.
Let’s look at how accounting functions through each of the above processes…
Accounting ensures accuracy of data being collected in order to make those data accurate by ensuring their integrity.
The first phase is the collection of data through source document or supporting document. As a transaction occurs, a source document is being raised either by the business, the other party or a third party.
What are these source or supporting documents? They are as follows:
- Quotes/Estimates Purchases Order 3. Delivery Dockets/Notes
- Sales/Purchases Invoice 5.Credits/Debit Notes 6. Payment/Remittance Advice
- Cheques 8.Payment Vouchers 9. Receipts
- Deposits Slip 11. Others
See the templates of some source documents
Now let’s look at the next one classifying the transactions
The second phase is classifying or categorizing the transaction in the main 5 elements of financial statement which are: assets, liabilities, owners equity – all these are in balance sheet or statement of financial position while revenue and expenses are elements of income statement.
Every transaction must be classified or categorized into any of these elements of financial statement.
The third phase is recording the transaction in the books of account such as journals and the general ledger. This is a technical area that requires a sound accountant or bookkeeper who can post to the correct account in the ledger.
The journal and the general ledger could be manual or computerized accounting system. The computerized system is in terms of accounting software. In this day of technology, it is better to use accounting software. There are two categories of software: off the shelf software and online or cloud software.
The fourth phase is summarizing the balances in each of account in the general ledger into a Trial Balance with the objective of detecting errors or irregularities. However, trial balance is not a fool proof that all errors will be detected by it, but it provides basis to do a careful examination. This provides a good avenue for the next phase.
The fifth phase is reporting. It is at this stage that the income statement, statement of financial position or balance sheet, cash flow statement, value added statement, five-year summary and notes to the account are prepared using the trial balance.
These are called the final accounts
The last phase which is the sixth, is interpreting the financial statement, knowing the “facts behind the figures”. This will be dealt with exhaustively on Day 5.
That’s it for today’s lesson. We have a lot to go over in the next few days
if you want to learn how to Grow Your Business with Accounting make sure you look for
your next lesson tomorrow. In your next lesson we will be talking more about how accounting works.
Thank you again for joining, If you have any questions or need any
assistance please feel free to contact me at anytime using the contact
information below. I will be happy to help,
Yours in enhancing your profitability and growth