Thursday, December 7, 2006

Basic Accounting

Money
Basic Accounting
By Cecille Chuapoco-Remedio

An accounting system facilitates management planning, control and decision-making. It helps a company to comply with laws, do routine administrative work, and protect its assets.

An accounting system is an organized arrangement of records, business machines, employees and procedures to gather, process, and report financial and other information so that your company may do business effectively. It comprises the related activities for processing and reporting financial data, the written records and reports vital to gathering, processing, storing and communicating information, the machines and devices used in the system to speed up and control work, and the employees directly involved in accounting.

An accounting system facilitates management planning, control and decision-making. It helps your company to comply with laws, do routine administrative work (like billing, paying, receiving and procuring), and protect the business by watching over its assets. Your company keeps an accounting system mainly to provide information on its operations and financial position to management, investors, government agencies, suppliers, clients or customers, labor groups and creditors. Its basic components are the following:

Business papers and forms. The business papers and forms are written documents or evidence of your company's transactions. They serve as a basis for recording those transactions on its books of accounts--its journals and ledgers--and fix responsibility for creating, recording or completing transactions. The company forms for those transactions affecting income include the Sales Order, Delivery Receipt, Sales Invoice, Provisional Receipt, Official Receipt, and Debit/Credit Note. The forms for those transactions affecting expenses include the Purchase Requisition, Canvass/Bid Sheet, Purchase Order, Receiving Report, Check Vouchers, Cash Vouchers, and Debit/Credit Note.

To make effective documents, your company must design all of them with the user in mind. They must be user-friendly and take into account the number of users and their needs. They must be self-descriptive, legible, serially numbered, and provide enough space for signatures.

Business machines. Your office machines and equipment facilitate the recording, processing, and storing of the business transactions documented in the forms. They enhance your internal control system. These machines include your calculators, cash registers, adding machines, typewriters, time-recording machines, check writers, mimeographing machines, photocopiers, computers and filing equipment. Your company would have determined the cost of acquiring and maintaining its machines before buying them.

Journals and ledgers. Your company's book of accounts consists of journals and ledgers. It records all its business activities in these ledgers. Simple businesses use only a general journal and a general ledger as books of accounts, but more diverse businesses use special journals to record more transactions. Special journals reduce the time spent on detailed recording, improve internal control, and allow division of labor--since your company may assign a different employee to handle each journal. The most commonly used special journals include the Sales Journal (for recording sales on credit), the Purchases Journal (for recording purchases on credit), the Cash Receipts Journal (for booking all cash payments received), and the Cash Disbursements Journal (for booking all cash paid out).

'Special journals reduce the time spent on detailed recording, improve internal control, and allow division of labor.'
Some businesses may use a Check Register to record all transactions requiring check disbursements, and a Voucher Register (instead of the Cash Disbursements Journal) to record all transactions requiring cash disbursements. Your company may use a combination of journals depending on its volume of transactions. The journals that are usually combined are the Cash Receipts and Disbursements Journal, the Sales and Cash Receipts Journal, and the Purchases and Cash Disbursements Journal.

The Chart of Accounts. Your company uses this chart to list all accounts in systematic form with identifying numbers or symbols. The aim is to provide the framework for summarizing your company's business operations. The specific accounts your company requires will depend on the nature of its business, its activities, the information it must provide in its financial statements, and its controls on the accounting functions.

In designing the Chart of Accounts, it's important that your company include all types of transactions, and to classify them in sequence to help it prepare its financial reports. It must clearly define the use of each account, which must be specific to establish control of management accountability.

Financial reports. These are usually the output of your accounting process. They include the Balance Sheet, Income Statement, and Statement of Changes in the Cash Flows. Your company may prepare other schedules and reports according to what your management and other parties like investors, lenders, and government agencies require of it.


This article appears in the October 2004 issue of Entrepreneur Philippines. Get more helpful articles like this from every issue of Entrepreneur Philippines!

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