Introduction to Book-Keeping and Accounting:
1. Definition
Book-keeping[Esa1] :
- the process of recording the financial transactions accurately and systematically according to certain set of rules.
- part of accounting that is concerned with recording data
- the process of recording data relating to accounting transactions in the accounting books.
Accounting[Esa2] :
- concerned with recording data, classifying and summarizing data and communicating what has been learned from the data.
- recording data (book-keeping), classifying data (respective accounts), summarizing (trading and profit and loss account & balance sheet), communicating data (distribute to stakeholders[Esa3] )
- classifying accounting information for the preparation and interpretation of financial reports.
- analyzing and interpreting business transactions[Esa4] and accounting reports to aid business decision-making and make appropriate actions for the growth of the business.
2. Purpose
Book-keeping:
- show movement of cash inflows and outflows within the business
- provides evidence that a business transactions have taken place.
- supplies all information regarding the expenses and revenue of the business
Accounting:
- show a clean presentation of the business’s financial statement
- help in decision-making for budgeting and speculating the present and the future earnings or losses of the business
- show the financial health of the business
- to communicate financial information to various interested parties (stakeholders)
- Show results of the operations of a business (making profit or loss)
3. Difference between Book-keeping and Accounting
Book-keeping: Simple recording of transactions
Accounting: the use of the information recorded by the book-keeping operation to produce reports for management, owners and others.
4. Basic terms / concepts in book-keeping and accounting.
Accounting unit or Entity
- business is an entity by itself, separate from its owner(s)
Capital
- cash or any assets brought by the owner(s) for investment in the business
Accounting or trading Period
- only those transactions which affect the profit and loss of the business for a given period will be taken into account.
- period[Esa5] depending on the volume and nature of the business
Going Concerned
- always assume the business indefinite (unknown) period of time, therefore all value of the assets must be recorded at cost price (purchase price).
ACCOUNTING APPROACH
Step1: documents
- collecting and examining source documents ( invoices, receipts, vouchers etc)
Step 2: journals
- Source Documents posted into respective journals
Step 3: Ledger
- Journals entries posted to respective accounts in the ledger
Step 4: Trial Balance
- Use trial balance to see the accuracy of the entries in the ledger
Step 5: Adjustments
- adjustments are made to the accounts to comply with the accounting concepts
Step 6: Closing Accounts and Stock Valuation
- Ledger accounts are closed and the closing stock valued
Step 7: Financial Statements
- prepare trading, profit and loss accounts and the balance sheet.
QUESTIONS:
1. What is book-keeping and accounting?
2.Why is book-keeping and accounting important?
3. What are the differences between book-keeping and accounting?
4. Is a company an entity? why?
5. How long is an accounting or trading period of a business?
6. Define Going Concerned concept.
7. Who are the stakeholders of Sekolah Perdagangan?
8. Who are the stakeholders of BSP?
9. On 1 May 2007, Hans Issac started a business and deposited $5000 into a bank account opened specially for the business. What is that $5000?
10. Write down the accounting approach.
Classification of Accounts
Accounts classified into 3:-
1. Personal Accounts[Esa6]
- Record transactions with persons, whether they can be people or firms
- these accounts show the relationship between the business and these
people
Double Entry system:
Debit – receiver
Credit - giver
2. Nominal Accounts[Esa7]
- Records all costs, expenses, losses and all gains and income
- Note: Sales account and purchases account are real accounts but since they are frequent nominal transactions, therefore nominal accounts.
Double Entry System:
Debit – all expenses and losses
Credit – all gains and income
3. Real / Property Accounts[Esa8] .
- Record assets (things) owned by business
Double Entry System:
Debit – what comes into the business
Credit – What goes out of the business
Questions:
1. Define personal, nominal and real accounts and write some examples for each of the respective accounts.
2. Write down the double-entry for personal, nominal and real accounts.
3. State the reasons why sales account and purchases account are nominal accounts.
TYPES OF BUSINESS ORGANIZATIONS[Esa9] :
There are 3 business forms: Sole-proprietorship (sole trader),
Partnership,
Company.
Sole-Proprietorship
- One-man business (only have one owner)
- Owner in complete control (controls the company completely. all decisions are made by trader only)
- Unlimited liability (personal belongings can taken away to pay debts)
- Limited capital (trader can only bring capital into the business. nobody else)
- Easy to set up. Only have few regulations
- Not subject to tax
- All profits or losses are borne by the owner
- may lose own possessions in failure
- confidentiality: stays with proprietor
- business ends with the owner’s death, insanity or bankruptcy
- close contact with customers and suppliers
Partnership:
- owner has to perform many tasks.
- minimum of 2 and maximum of 20 people in the business
- share responsibilities among partners
- Unlimited Liabilities
- partners contribute capital in the business (more partners, more capital injected in the company)
- Easy to set up.
- Not subject to tax
- All profits or losses are shared by all partners
- partners have to draw up partnership agreement
- conflicts and disagreements may occur
- business ends with the owner’s death, insanity or bankruptcy
- close contact with customers and suppliers
- time consuming in decision making
Companies:
- Managed by Board of Directors
- Dividends declared by directors
- Legal entity – can be sued
2 types of companies:
1. Private Limited (Ltd) Co
2. Public Limited (Ltd) Co.
1. Private Ltd Co.
- Minimum 2 and maximum 50
- shares cannot be sold to the public
- Limited Liability
- The business name ends with
“Pte Ltd” (in Brunei Sdn Bhd)
2. Public Ltd Co.
- Minimum 2 and no limit
- Share can be offered to the public
- Limited Liability
- The business name ends with
“Plc”
Note:
Public Sector Organization [Esa10] (also a business organization but only providing services to the community with little or no profit)
The public sector is made up of public corporations (nationalized industries), government departments ( e.g Department of Health) and local government services ( e.g. council-run leisure centres). The emphasis here is not on making a profit but on providing a service for the community. Increasingly this objective has become more commercialized with government agencies having to operate within strict budget guidelines and to rely on cost savings for extra funding rather than on increased government subsidy.
Questions:
1. Write down 3 advantages and disadvantages of a sole-trader.
2. State in your own words 3 advantages and disadvantages a partnership.
3. How many limited companies are there? State the companies.
4. Write down the 3 different characteristics of Private Limited and Public Limited Company.
5. What distinguishes a private limited company from a plc?
6. What does the term “limited liability” mean and why is it so important?
7. write down an example of a partnership, Ltd and Plc companies in your country.
8. What is the purpose of the public sector organization?
Endnotes:
[Esa1]Process of recording financial transactions
[Esa2]The act of recording, classifying, summarizing and communicating accounting information.
[Esa3]Any person or group who have an interest in the business’s performance.
[Esa4]business activities related to the firm and expressed in money terms.
eg. Buying and selling of goods.
[Esa5]maybe a month, half-year, full-year or any length of time.
[Esa6]Eg. Debtors, Creditors, Capital.
[Esa7]commission received, interest received, wages and salaries, rent paid, travelling expenses.
[Esa8]Eg. cash in hand, stock, machinery, buildings etc.
[Esa9]There are many types of business in the commercial world. Each type of business has a role to play in the modern economy with its own unique benefits and drawbacks.
[Esa10]the government
The Tutor
- najmoon esa
- do something good bcoz u think it's right. not bcoz its a trend that u need to follow coz everybody is doing it. Think! Dnt waste ur brain and be stupid.