Understanding Bookkeeping

From earlier articles, we understand that every transaction is recorded in a book of original entry from a source document.

Append below the various book of original entry, the transactions being recorded and the related source document(s) being used.

The recording process is the process of which we record the business transactions by using an accounting procedure. Recording process starts with recording in:

1. Journals
2. Ledger and then
3. Trial Balance (more…)

1. Accounting transactions are recorded by using an accounting system.
2. Accounting systems are designed to show the increases and decreases in accounts in the financial statements.
3. There are five major accounts in financial statements:

• Assets
• Liabilities (more…)

Remember the following accounting concepts:

1. Accounting entity concept/economic entity,business entity concept- the business is a separate entity from its owners.
2. Accrual concept-revenue is recognized when it is earned and expenses when they are incurred.
3. Accounting period concept-the indefinite life of a busiess entity is divided into accounting periods for the purpose of preparing financial reports.
4. Consistency concept-states that accounting methods and practises should not differ from period to period so as to enable comparisons between periods to be made.
5. Going concern concept-is the assumption that a business will operate indefinitely.
6. Historical cost concet-where all transactions are recorded at the original cost to the business.
7. Money measurement-refers to the identification and measurement of economic events in financial terms ( say in USD).
8. Matching principle/concept-revenue earned during an accounting period has to be matched with the expenses associated with the revenue generated.
9. Objectivity concep- states that there must always be objective verifiable evidence for the occurence of any business transaction.
10. Prudence concept-considers that it is prudent neither to overstate profits and assets nor understate losses and liabilities.

• The accounting equation is based on the business entity concept which assumes that the business, as a unit by itself, acquires its own assets through funds supplied by the owner or by external sources.

• The accounting equation =Assets=Owner’s Equity + Liabilities

• Assets are items of value owned by the business

• Liabilities are amounts owed by a business to external parties.

• Owner’s equity is the owner’s interest or claim on the business

• Owner’s Equity=Assets-Liabilities

• Owner’s equity can be increased through investment by the owner or as a result of profit earned from business operations
• Owner’s equity can be decreased through withdrawals by the owner for personal use or as a result of losses made from business operations.
• The Balance Sheet is a statement listing all assets, owners’s equity and liabilities AT A PARTICULAR DATE
• The balance sheet totals WILL ALWAYS BALANCE because the assets will always be equal to owner’s equity plus liabilities
• The accounting equation and the Balance Sheet are two different ways of expressing the same idea.
• The equality of the accounting equation and the balance sheet totals are always maintained no matter what transactions take place in the business

• Source document - a written document that provides details of a transaction and the evidence that the transaction has taken place. All accounting entries are based on information derived from these source documents. (more…)

1. Journal is referred to as the book of original entry
2. Significant contributons of journal to the recording process

• it discloses in one place the complete effects of a transaction (more…)

• An account has a debit balance when its debit total exceeds its credit total
• An account has a credit balance when its credit total exceeds its debit total
• Assets, expenses and drawings accounts have debit balances (more…)

• The Petty Cash Book records all payments made from the petty cash fund
• The petty cash voucher is a source document for all petty cash payments (more…)

• Know the difference between Accounting & Bookkeeping:
• Accounting-the process of recording, reporting and interpreting financial information relating to an organization that are relevant, reliable and comparable to help interested parties to make use of to make decision and
• Bookkeeping is the accurate and systematic recording of transactions and events, either manually or electronically. It is a subset to accounting which includes the use of information recorded through the bookkeeping operation for the production of financial reports.

• Transaction refers to any economic event or activity that affects the financial condition of an organization.
• Cash transaction refers to any transaction for which immediate payment is made.
• Credit transaction refers to any transaction for which payment is postponed to a future date.