Financial Accounting.

Financial Accounting Task 1

The purpose of a business keeping accounts is to record the financial transactions because the business needs to quantify items such as sales, expenses and profit. They then need to present the figures in a meaningful way to check the success of the business.

How the accounting system works

First of all the accountant collects all the prime documents together such as invoices, credit notes, bank paying in slips, cheques, BACS. Once the accountant has gathered all the sources they summarise the information into daybooks, journals and cashbooks. The accountant then has to make double entries for each transaction in the above books. Double entries must be made in the sales ledger, purchase ledger, nominal ledger (which are used for petty cash and bank and cash transactions). From these double entries a trial balance is compiled which checks all the figures and calculations. After both credit and debit figures match a statement of profit (or loss) is made these are called final accounts and include trading, profit and loss account and balance sheet.

Accounting records

Records of account are kept in two forms handwritten and computerised. Written accounts and is the traditional way of keeping accounts and is usually favoured by smaller businesses. Nowadays the large leather-bound volume is usually disbanded for ledgers and other accounting books, which can be bought in stationary shops.

Nowadays computers are beginning to be used more as it takes up less space and the transactions are automatically put into each ledger and a major advantage is that it is a very accurate method of recording each transaction.

When accounts are being maintained we ...

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Accounting records

When accounts are being maintained we should remember they should be kept accurately, up-to-date and confidentially. Accounts should also be kept neat, written in ink and correcting fluids should not be used as if the accounts are audited, the correction fluid could conceal fraudulent transactions.

Business Documents

Different business documents are used throughout accounting and each has its own relevance and importance. The invoice is what is received when a good or service is bought, on the invoice it should state the amount owing to the company the service or good was bought from, when the amount should be paid and the details of the good or service which has been provided.

Invoices are prepared for two types of sales:

Cash sales- where payment is immediate, whether it is cash, cheque, debit card or credit card.

Credit sales- this is when payment is to be made at a later date usually within 30 days. As well as credit sales there are credit purchase when your company buys something on credit you become a creditor. Also the customers buying on credit from you become debtors.

Credit notes- these are sent out to customers when they have bought from the company. The credit note states on it the amount of money, which has been returned, and the good or service, which it relates to.

Banking transactions- paying in slips, cheques and BACS transfers are all included within banking transactions. The three above documents are used regularly with in accounts as they are the three main ways of transferring money within bank accounts BACS stands for Banker Automated Clearing Services this automatically electronically transfers an amount of money from one bank account to another. Stuart is gay my boys oh Stuart is gay he fancies Aaron McClain my boy keep away my boys.

Recording of transactions

The primary documents I talked about earlier must be recorded in different books. Such as:

Sales day book- this is a list of all sales made which is compiled from invoices, which have been issued to customers.

Purchases daybook – this is a list of all purchases made this is compiled from all the invoices which are received from suppliers.

Sales returns day book- this is a list of good that have been returned to the company from customers, this list is compiled from all the credit notes which have been sent out to customers.

Purchases returns day book- this is a list of all goods, which the company has returned to the suppliers, and this list is compiled from all the credit notes, which have been received from suppliers.

Accounting concepts

There are a number of basic concepts which when preparing accounts are followed:

Business entity - this refers to the fact that assets and liabilities of which plays a part in owning or running the business are not include with the owner’s personal assets and liabilities. The only links between the owner’s personal funds and the business are capital and drawings.

Money measurement- this means that all items is expressed in the common denominator of money. That is the only way items can be added together to achieve a net profit or balance sheet total. The only disadvantage is that certain items such as an efficient management and good labour force cannot be expressed in money terms.

Historical cost concept-