The Need for Accounting
Every
organization needs to maintain good records to track how much money they have,
where it came from, and how they spend it. These records are maintained by
using an accounting system. These
records are essential because they can answer such important questions as:
• Am I making or losing money from my business?
• How much am I worth?
• Should I put more money in my business or sell it
and go into another business?
• How much is owed to me, and how much do I owe?
• How can I change the way I operate to make more
profit?
Even
if you do not own or run a business, as an accountant you will be asked to
provide the valuable information needed to assist management in the decision
making process. In addition, these records are invaluable for filing your
organization’s tax returns.
The
modern method of accounting is based on the system created by an Italian monk Fra
Luca Pacioli. He developed this system over 500 years ago. This great
and scientific system was so well designed that even modern accounting
principles are based on it.
In
the past, many businesses maintained their records manually in books – hence
the term “bookkeeping” came about. This method of keeping manual records was
cumbersome, slow, and prone to human errors of translation.
A faster, more organized, and easier method of maintaining books is
using Computerized Accounting Programs. With the decrease in the price of
computers and accounting programs, this method of keeping books has become very
popular.
Accounting
and Business
Accounting
is the system a company uses to measure its financial performance by noting and
classifying all the transactions like sales, purchases, assets, and liabilities
in a manner that adheres to certain accepted standard formats. It helps to
evaluate a Company’s past performance, present condition, and future prospects.
A more formal definition of accounting is 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 a financial
character and interpreting the results thereof.
What Accountants Do
We have said that accounting consists of
these functions:
• Recording
• Classifying
• Summarizing
• Reporting and evaluating the financial activities of
a business
Before
any recording can take place, there must be something to record. In accounting,
the something consists of a transaction or event that has affected the
business. Evidence of the transaction is called a document.
For
example:
• A sale is made, evidenced by a sales slip.
• A purchase is made, as evidenced by a check and
other documents such as an invoice and a purchase order.
• Wages are paid to employees with the checks and
payroll records as support.
• Accountants do not record a conversation or an idea.
They must first have a document.
In
almost any business, these documents are numerous and their recording requires
some sort of logical system. Recording is first carried out in a book of
original entry called the journal. A journal is a record, listing transactions
in a chronological order.
At this point, we have a record of a great volume of data. How can this
data best be used? Aside from writing down what has occurred for later
reference, what has been accomplished? The answer is, of course, that the
accountant has only started on his task. This great volume of data in detailed
listings must be summarized in a meaningful way.
When asked, the accountant must turn to
these summaries to answer questions like:
• What were total sales this month?
• What were the total expenses and what were the types
and amounts of each expense?
• How much cash is on hand?
• How much does the business owe?
• How much are the accounts receivable?
The
next task after recording and classifying is summarizing the data in a
significant fashion.
The
records kept by the accountant are of little value until the information
contained in the records is reported to the owner(s) or manager(s) of the
business. These records are reported to the owners by preparing a wide variety
of financial statements.
The
accountant records, classifies, summarizes, and reports transactions that are
mainly financial in nature and affect the business. The reporting, of course,
involves placing his interpretation on the summarized data by the way he
arranges his reports.
Every
business has a unique method of maintaining its accounting books. However, all
accounting systems are similar in the following manner:
• Business documents representing transactions that
have taken place. (A business transaction occurs when goods are sold, a
contract is signed, merchandise is purchased, or some similar financial
transaction has occurred).
• Various journals where the documents are recorded in
detail and classified
• Various ledgers where the details recorded in the
journals are summarized
• Financial reports where the summarized information
is presented
Where variations exist, they have to do with the way the business
transaction is assembled, processed, and recorded.
These
methods are partly arbitrary. First, you must understand certain simple
principles of accounting. When you have a firm grasp of the fundamentals you
can deal with any kind of accounting problem.
Advantages
of Computerized Accounting
Some of the
advantages of using a computerized accounting system are:
• The arithmetic of adding up debits and
credits columns is done automatically and with total accuracy by the computer.
• Audit trails or details are
automatically maintained for you.
• Produce financial statements simply by
selecting the appropriate menu item.
• A computerized system lets you
retrieve the latest accounting data quickly, such as today’s inventory, the
status of a client’s payment, or sales figures to date.
• Data can be kept confidential by
taking advantage of the security password systems that most accounting programs
provide.
Computerized
accounting programs usually consist of several modules.
The principal
modules commonly used are:
• General Ledger
• Inventory
• Order Entry
• Accounts Receivable
• Accounts Payable
• Bank Manager
• Payroll
In
a good accounting system, the modules are fully integrated. When the system is
integrated, the modules share common data. For example, a client sales
transaction can be entered in as an invoice, which automatically posts to the
General Ledger module without re-entering any data. This is one of the greatest
advantages of a computerized
accounting system – you need to enter the information only once. As a result of
this:
• Data entry takes less time.
• There is less chance that errors will occur.
• You do not have to re-enter data for posting.
No comments:
Post a Comment