Examining the methods and concepts of accounting process - Free Essay Example

Sample details Pages: 7 Words: 2189 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Argumentative essay Did you like this example? The purpose of accounting is to provide the information that is needed for sound economic decision making. The main purpose of financial accounting is to prepare financial reports that provide information about a firms performance to external parties such as investors, creditors, and tax authorities. There are several steps show how accounting done using accounting cycle. Don’t waste time! Our writers will create an original "Examining the methods and concepts of accounting process" essay for you Create order Analyzing step in the accounting cycle is the first, it involves categorizing all receipts for business purchases and supporting documentation, such as bank statements. Next step is Journalize, it is to record each transaction into a General Journal. This is the double-entry system and the bookkeeper will record a credit (plus) amount and a debit (minus) amount to each account. After journalizing a transaction, transfer it to a ledger. Each account has its own ledger to allow the business owner to see expenditures in that account at a glance. Next steps is unadjusted trial balance, the accounting equation states that assets are equal to the owners equity plus his liabilities. The unadjusted trial balance provides a tally of the totals, as either a debit or a credit, and is used as the basis for performing the process discussed in the next section, adjusting entries. Sometimes transactions occur through means other than checks and receipts. These include interest, finance charges or p repayments. After completing the adjustments, make another trial balance. Four financial statements are commonly prepared at the end of an accounting period to inform the owner or investors about the health of the business and current profits. The first is the Income Statement, followed by a Statement of Earnings, a Balance Sheet and finally, a Cash Flow Analysis. The last steps is closing the books which is prepared at the end of the fiscal year, the business owner will close the previous years accounts and start fresh in the next year. This involves crediting or debiting income accounts to bring the balances to zero. A temporary Summary Income account is created to use as the second half of the double-entry system and close it out at the end of the year and start fresh the next fiscal year. 2. Explain what is income statement or the profit and loss account and balance sheet statement. what is income statement or the profit and loss account? The income statement cover a period of time, the balance sheet is a report at a point in time. The income statement usually shows two main categories, revenues and expenses. Revenue are listed first. Typical operating expenses for most businesses are employee salaries, utilities, and advertising. For Safeway, as with any retail firm, the largest expense is for cost of goods sold. The different between sales and cost of goods sold represents the different between the retail price Safeway receives from a grocery sale and the wholesale cost of the groceries that are sold. This difference (sale cost of goods sold) is called gross profit or gross margin. Expenses are sometimes divided into operating and non operating categories. Two other items that frequently appear in the income statement are gains and losses. Gains and losses refer to money made or lost on activities outside the normal business of a company. One final bit information required on the income statements of corporations is earnings (loss) per share (EPS). This EPS amounts is computed by dividing the net income (earning or loss) for the current period by the number of shares of stock outstanding during the period. Example of income statement format are as example 2.2. Format for Income statement account. XXX Berhad. Income statement for the year ended 31 June 20xx Sales XX ( ) Return inward/sales return XX Net sales X ( ) Cost of sales : Opening balance inventory XX Purchase XX ( ) Return outward/ Purchase return XX X ( + ) Carried in XX X X ( ) Closing inventory XX X Gross profit X ( + ) Other income : Rent receive XX Discount receive XX X X ( ) Expenses : Carriage outwards XX Salaries XX Rent XX Insurance XX Rental XX X Net profit / loss X 2.3 what is balance sheet statement? A balance sheet is presented for a particular date because it reports a companys financial position at a point in time. The balance sheet is divided into the major sections we have described: assets, liabilities, and owners equity. The asset section identifies the types of assets owned by Safeway (cash, for example) and the monetary amounts associated with those assets. The liabilities section defines the extent and nature of Safeways debts (income taxes not yet paid, for example). Owner equity completes the balance sheet. This section identifies the portion of Safeways resources that were contributed by owners, either in exchange for share of stock or as undistributed earnings since Safeways inception. Together with liabilities, Owners equity indicates how a company is financed (whether by borrowing or by owner contributions and operating profits). Classified balance sheet is needed to prepare the balance sheet statement in which assets and liabilities are subdivided into current and long-term categories. 2.4 Format for balance sheet account. XXX Berhad. Balance sheet as at 31 December 20xx Non Current Assets Motor vehicle XX Premises XX Fixture Fitting XX X Current Assets Closing inventory XX Receivable XX Bank XX Cash XX X Total Assets X Financed by: Capital XX ( + ) Net profit / ( ) Loss X X ( ) Drawing XX X ( +) Current Liaabilities Creditor XX Overdraft Bank XX X Long term liabilities Bank loan XX X X 3. Explain what is capital and revenue expenditure. 3.1 What is capital expenditure? Capital expenditure consists of expenditure, the benefit of which is not fully enjoyed in one accounting period but spread over several accounting periods. It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business or effecting economy in the operation of an asset. These are not meant for sale. Expenditure incurred for improving assets and extending an existing asset is also capital expenditure. The sum of invoice price, freight and insurance charges, installation and erection cost and custom duty etc. will be capitalized in the books of a firm. These capital items appear on the assets side of Balance Sheet. 3.2 Examples of capital expenditure: Interest on capital paid during the period of construction of Company (u/s 208 of Indian Companies Act) Expenditure in connection with or incidental to the purchase or installation of an asset. Acquisition of new assets. Expenditure incur red for putting the old asset purchased, into working condition. Additions and extensions to existing assets. Interest and financing charges paid, brokerage and commission paid. Betterment of fixed assets or improvement of an asset to produce more, to improve its earning capacity or to reduce its operating expenses or to increase the life of asset. 3.2 What is Revenue expenditure? Revenue expenditure consists of expenditure incurred in one period of the accounting, the full benefit of which is enjoyed in that period only. This does not increase the earning capacity of the business but it is incurred in order to maintain the existing earning capacity of the business. It includes all expenses which arise in normal course of business. The benefit of such expenditure is for a short period, say, one year only and it is not to be carried forward to the next year. The expenditure is of a recurring nature i.e. incurred every year. 3.4 Examples of revenue expenditure: Pu rchase of raw materials for conversion into finished goods. Selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses, advertisement charges, et(% Establishment expenses like salaries, wages, rent, rates, taxes, insurance, depreciation on office equipment. Depreciation of plant, machinery and equipment. Expenses incurred in order to maintain the existing fixed assets in an efficient and workable state such as repairs to building, repairs to plant, white-washing and painting of building. 4. Explain what is bank reconciliation statement. 4.1 Definition or meaning of bank reconciliation statement Bank reconciliation involves comparing your record of transactions and balances to the banks record of transactions and balances. You go through every transaction in your account and make sure you and the bank agree on the transaction. Some items, such as outstanding checks, wont show up on your bank statement because the bank doesnt know about them yet. Likewise, there may have been electronic transfers at the bank that you didnt know about. Bringing all of these things into the open is what bank reconciliation is all about. If youre familiar with balancing your check book, then youre familiar with bank reconciliation. Youre essentially doing the same thing for the same reason. Bank reconciliation happens when you compare your records to the banks records. You should do a bank reconciliation at least every month to make sure you know whats happening with your accounts. Lets review how bank reconciliation works and why i t is so important. Adjustments that are commonly made by a bank to a companys account include : NSF (non sufficient funds). This is the cancellation of a prior deposit that could not collected because of insufficient funds in the check writers (payers) account. When a check is received and deposited in the payees account, the check is assumed to represent funds that will be collected from the payers bank. When a bank refuse to honor a check because of insufficient funds in the account on which it was written, the check is returned to the payees bank and is marked NSF. The amount of check, which was originally recorded as a deposit (addition) to the payees account, is deducted from the account when the check is returned unpaid. MS (miscellaneous). Other adjustment made by bank. ATM (automated teller machine) transactions. These are deposits and withdrawals made by the depositor at automated teller machines. It is unusual for the ending balance on the bank statement to equ al the amount of cash recorded in a companys cash account. The most common reasons for differences are: Time period differences . The time period of the bank statement does not coincide with the timing of the companys postings to the cash account. Deposits in transit. These are deposits that have not been processed by the bank as of the bank statement date, usually because they were made at or near the end of the month. Outstanding check. These are checks that have been written and deducted from a companys cash account but have not cleared or been deducted by the bank as of the bank statement date. Explain What is Assets and Liabilities. What is Assets? Assets is resources of the owned that controlled by a business. It help to generate future income. Assets can be divided into two which is Current assets and fixed assets Current assets are those that form part of the circulating capital of a business. They are replaced frequently or converted into cash during the course of trading. The most common current assets are stocks, trade debtors, and cash. Compare current assets with fixed assets. A fixed asset is an asset of a business intended for continuing use, rather than a short-term, temporary asset such as stocks. Fixed assets must be classified in a companys balance sheet as intangible, tangible, or investments. Examples of intangible assets include goodwill, patents, and trademarks. Examples of tangible fixed assets include land and buildings, plant and machinery, fixtures and fittings, motor vehicles, office equipments and IT equipment. What is Liabilities? Liabilities are simply debts of a corporation.ÂÂ   Nearly all businesses have liabilities; even the most successful and profitable of companies will make purchases on credit.ÂÂ   Most companies also find it desirable to borrow money as a means of expanding operations more rapidly.ÂÂ   The borrowed money can be used to purchase new machinery, or additional merchandise that can be used to produce additional items to be sold to customers. Liabilities also can be separated into two groups which is current liabilities and non current liabilities. Current liabilities refer to short term debt obligations of a company, to its creditors and suppliers, which are due within 1 year.ÂÂ   For example trade payables, bank overdraft, prepaid income, and accurate expenses. Long-term liabilities are liabilities that will most likely exist for more than a year. These liabilities are made infrequently, theyre usually significant and they are meant to be liquidated (paid off) over o r after a few years. Long-term liabilities include long-term bonds, mortgages and leases that will be paid over several years. Referencing What is income statement or the profit and loss account, W. Steve Albrecht,Earl K. Stice,James D. Stice, 2008, Financial Accounting, 10th edt, Rob Dewey, United Kingdom, pg 39-41 What is balance sheet statement, W. Steve Albrecht,Earl K. Stice,James D. Stice, 2008, Financial Accounting, 10th edt, Rob Dewey, United Kingdom, pg35-39 What is capital and revenue expenditure, Viewed 22 June 2010, https://ezinearticles.com/?Capital-and-Revenueid=616033 What is bank reconciliation statement, viewed 22 June 2010, https://banking.about.com/od/businessbanking/a/bankreconciliat.htm Definition or meaning of bank reconciliation statement, W. Steve Albrecht,Earl K. Stice,James D. Stice, 2008, Financial Accounting, 10th edt, Rob Dewey, United Kingdom, pg 247 What is Assets, Viewed 25 June 2010, https://www.tutor2u.net/business/accounts/assets_fixedassets_intro.asp What is Liabilities, Viewed 25 June 2010, https://www.money-zine.com/Definitions/Investing-Dictionary/Liabilities/