Accounting Assignment
Faizan Ul Karim – 24869
Accounting Cycle:
Accounting cycle refers to a process that comprises of identifying, analysing, and recording the
accounting events that may occur. Performing all these steps helps us to create an easier
environment for business owners so that they can record their financi al statements. Earlier
accounting cycle was performed manually by the works but currently the computer software uses
the automated accounting cycle. The accounting cycle is further sub divided into 8 major steps :
•
Firstly, a transaction is identified. If a transaction is capable of a book recording event, then
it is considered as a transaction.
•
Next step is to record these transaction s to a journal. Using journal entries, the transactions
are recorded.
•
When a transaction is recorded in a journal the next st ep is to post this transaction to a
general ledger. With the help of general ledger, you can observe the breakdown of
transactions by account.
•
Now the trial balance is created. This assures us that the debit is equal to the credit amount.
•
Now the created worksheet is analysed very carefully, and the required adjustments are
made. The adjustments are only made when credit is not equal to debit.
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Now the corrections are made in the worksheet to assure everything is perfectly balanced.
•
Now a company finally prepares a financial statement with the help of trial balance that has
been created earlier.
•
This step is called Closing the books. A company prepares a post-trial balance to make sure
that all is good to start a new cycle.
In short it is a very holistic task to identify and process all types of business transaction but now the
automation has helped the business to rapidly help them out with such a tedious task.
Recording:
Recording business transactions is one of the most essential steps that is required to make sure
accounting cycle runs perfectly fine. And since automation has taken place in recent times thus
computers have started to play an important role in recording financial transactions. The advantage
of using such technology is that it provides all t he functions that were being fulfilled manually and
reduce chances of error too. Sharing of files and making amendments to any entry made is way
easier when computer is readily available to you. Spreadsheets are one of the most helpful entity
that is used in accounting. It helps to:
•
To calculate budgets for future expenditure
•
To produce invoices to keep a check on the products sold
•
To determine sales figures for a specific product
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Mostly businesses now use large scale accounting packages which is cost effic ient to the owners.
This comprises of various features like:
1. Daybooks
2. Ledgers
3. Trial Balance etc.
Two things that make up the recording process are called:
i.
Debit
ii.
Credit
These both words help us in determining that where the entries should be made in the account. For
instance, when the amount is entered on the left side of the account it is said that the account has
been debited. Whereas when the entry is made on the right side it is said that the account is
credited. After recording the data both the side s are compared and in normal circumstances the
credit column amount should match with the debit one. But in case when debit amount exceeds the
credits it is said that the account is showing debit balance and in the other case it is said that the
account is showing credit balance. The basic three steps that constitute the recording of a business
transaction are as follows:
➢ Analyse each transaction to decide its fate that whether it goes to the debit side or the
credit side
➢ The transaction is then entered in the information journal
➢ The information entered in journals is then posted to the respective ledgers.
The evidence of a transaction is given by the help of sales receipt or a business document.
Accounting & Financial Reporting Concepts:
There are two accounting methods that are often used and are as follows:
•
Accrual Accounting
•
Cash Accounting
Firstly, we will shed some light on accrual accounting. Accrual accounting is way that is adopted
irrespective of the fact that a cash transaction has occurred or not. When a cash transaction does
not take place and still a company’s position and performance is measure is referred as accrual
accounting. It is a method of accounting which is used when transaction occurs whether the
payment is received or not. This m ethod of accounting is associated with Matching Principle. This
principle states that revenues and expenses should be recorded in the same event . company can
merge the current cash inflows and outflows with cash inflows and outflows that can take place in
future and help us to give a much clearer picture of company’s financial position. This is often
referred as standard accounting practice for small businesses.
Accounting measurement is figuring of financial activity that is expressed in terms of money or
hours. The evaluation of accounting data of a compan y is done my accounting measurement which
also helps us to compare the accounting data. Using such standard measurement, a company is able
to compare data that lies in a specific time frame and helps the company to understand where it
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stands and how it is operated. This method helps analysts in performing their work too. The
investors and analysts can compare the da ta of two companies to evaluate their positions.
Accounting is often associated with the term money but that is not the case. An event that occurs
can be recorded in various term be it the jobs produced, or the number of hours labour has spent
working. This measurement standard is based on Unit of Measurement Concept. This concept states
that all currency that inflows must be reported in the same currency collectively. Even if certain
transactions are made in foreign currency the amount reported will be in the specific same
currency. Two major parts of measurements are Relevance and Faithfulne ss. Relevance refers to
that financial information that can make a difference in a decision whereas faithful is referred a
quality that states that the numbers and descriptions entered are factual and existed.
Assumptions are said to be the basic framework on which the accounting world stands on. There are
two major assumptions around which the accounting world revolves and are as follows:
▪
Monetary Unit Assumption
▪
Economic Entity Assumption
Monetary Unit Assumption that only those transactions can be recorded in accounting books that
are expressed in terms of money. With the help of this assumption, we can measure the economic
events that occur in a company. This assumption is somewhat an extension to the historical cost
principle. This assumption helps us in preventing us to record irrelevant information in the books
specifically those that are not expressed in terms of money. For instance, the number of employees
in a company or how many hours they spent working can not be the part of accounting books
because they do not fulfil this assumption as they are not expressed in terms of money.
Economic Entity Assumption states that the entities of a company should be kept private f rom the
economics entity of owner’s life a nd any other company or economic event that is not related to the
company. The personal living cost of a person should not interfere with the expenses or the
revenues that a company holds. Economic entity is specifically referred to a unit in a society.
There are 3 kinds of units as such and are as follows:
▪
Proprietorship
▪
Partnership
▪
Corporation
Proprietorship is referred to a business that has only one owner. Usually, small businesses or
retailor shops are called proprietorship. As they are associated w ith lower scale thus a very small
amount of capital is required to give it a start. Since there is only a single owner thus all the profits
or the losses are in his fate. The assumption applies to this as well that the entities should be
remained distinct.
Partnership is referred to a business that is shared by two or more persons. Therefore, there are
partners in a business and thus it is called as a partnership. Before a partnership a document is
created that is often called a legal contract. In this case the profits or revenues or any debts will be
shared by the partners of the company and all of them have to bear the effect of it. Similarly, the
assumption applies to here as well. Same as in proprietorship you can not mix two entities and the
transaction in personal lives should be kept separate from the business. It is often said that
partnership is like proprietorship except the fact that it has two or more than two owners.
Corporation is a business entity that is based under state corporation law. The ownership of such an
entity is divided into shareable transfer of stocks. The shareholders of a company enjoy limited
liability because they do not have to bear any debts a company faces. A person who has the stocks
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of a company is completely free to sell his stocks anytime whether a company is facing profits or is
at loss. The same assumption applies here too those entities should be kept separate.
International Financial Reporting Standa rds that are often called IFRS is basically a set of
accounting principles that helps us to create comprehensive and clarified financial statements that
can be easily compared around the world. IFRS has been adopted by various countries that are
around 120 including the European Union however the USA has implemented the Generally
Accepted Accounting Principles that is also known as GAAP. The IFRS is issued by the IASB that is
also called International Accounting Standard Board. These basic principles help companies to
maintain their records and can get a clear picture of their expen ses and income. IFRS is also known
as a common accounting language that is easily understandable by either the auditors or regulators.
This has helped in bringing consistency across the board so that analysis and decision making by the
analyst can be made easier. This was developed by a not -for-profit London based organisation.
Generally Accepted Accounting Principles that are often called GAAP or US GAAP is a set of
accounting principles and standards that has been introduced by FASB also known as Financial
Accounting Standards Board. This is implemented in all the public companies of United States of
America. Their aim is to make clarified financial statements and consists of 10 basic principles which
are as follows:
1. Principle of Regularity
2. Principle of Consistency
3. Principle of Sincerity
4. Principle of Permanence of Methods
5. Principle of Non-Compensation
6. Principle of Prudence
7. Principle of Continuity
8. Principle of Periodicity
9. Principle of Materiality
10. Principle of Utmost Good Faith
This is all about GAAP and IFRS.
Financial Statements:
There are 4 basic financial statements that exist in the accounting world:
•
Income Statement
•
Owner’s Equity Statement
•
Balance Sheet
•
Statement of Cash Flows
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Income Statement at the first instant tells that whether a company is at profit or loss. While making
an income statement revenue is listed on priority and then expenses follow it . Whenever revenues
exceed the expenses, the company is said to be at profit whereas when expenses exceed the
revenues the company is said to be at loss.
Owner’s Equity Statement is made in compliance with the income statement. Owner’ s equity
statement refers to the changes in the owner’s equity durin g a specific time. The period is in
accordance with the income statement so in other words it is kind of dependent on Income
Statement.
Balance Sheet is a clear picture of company’s financial position at a specific time of the year be it a
day or a time. In a balance sheet assets, liabilities and owner’s equity is recorded which makes sure
that each of them balances each other out.
Statement of Cash Flows are used to summarize all the c ash inflows and outflows that occur du ring
economic events for a specific time.
Words: 2008
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