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The crucial responsibility of bookkeeping and accounting in business has increased the demand for bookkeeping and accounting job or services worldwide. Because of the high demand, it attained bookkeeping and accounting as two of the most profitable and worthwhile profession in the world. Accounting and bookkeeping are both significant instrument in corresponding the financial action, routine and condition of a business entity.
Bookkeeping is the logical recording of a company's financial events or business transactions. In bookkeeping, there are two ways which are single-entry and double-entry.
Accounting is the procedure of determining, calculating, recording and transmitting economic information to empower advisable and judicious resolutions and determinations by users of the information. Besides, accounting is a tool of analyzing the financial transactions of a business or a company comprehensively as well. Accountants who are responsible to the accounting, they require following a lot of rules and regulations. Furthermore, accounting is also permit a business to dissect the financial performances and get the net profit. Moreover, accounting can be defined as the bookkeeping processes concerned in building a financial record of business transactions and in the preparation of statements pertaining to the assets, liabilities, and operating results of a business.
To : Peter
From : John
Sphinx Sdn Bhd
Subject : Business Development
Date : 1st of March 2013
From your request on starting a business, I would advise you as below the form of organization firstly. Regarding the form of organization, there are three main types of business that you may consider and choose. First type of business is sole proprietorships. Sole proprietorship is a business owned by a person. The owner may employ employees or run on his or her own. The owner of the business has total and unlimited personal liability of the debts incurred by the business. The owner possesses all the assets of business and the profits created by it. They also charged with whole duty for any of its liabilities or debts. Advantages are free to run the business, subject to less regulatory needs and low start-up costs, profits from the business flow-through directly to the owner's personal tax return. The disadvantages are unlimited liability. The proprietor is personally liable for the debts incurred by the business.
The second type of organization is partnership which is a variety of business in which two or more people manage for the general objective of making profit. Regarding partnership, each partner has total and unlimited personal liability of the debts devoted by the partnership. Partnerships are easy to set up; wider capital base and contributes to different sets of skills to operate the business. Besides, the profits from the business flow directly through to the partners' personal tax return. However, liable for the debts even if it was caused by the actions of the other partner. It is subject to unlimited liability. The partnership will end if any one of the partners resigns or dies.
The third type of organization is corporation which is for profit, limited liability entity that has a separate legal personality from its members. A corporation is owned by multiple shareholders and is overseen by a board of directors, which hires the business's managerial staff. Corporations are subject to limited liability. In Malaysia, corporations are categorized into private and public companies. Private companies are known as Sendirian Berhad (Sdn. Bhd.) and public companies are known as Berhad (Bhd.). The disadvantages of corporation are requires more time and money than the others, may result in higher taxes. Dividends paid to shareholders are not deductible from business income thus this income can be taxed twice. After explained the form of organizations for you, I advised you to start a sole proprietorship business first. It is because you just retired as an engineer recently so that you do not have any experiences to operate a business appropriately but sole proprietor may control his business by his own ways. Furthermore, you do not have any partners so that you cannot start a partnership business. Moreover, your capital of your business RM300000 which is not enough for starting a corporation business as well and it is quite danger for you to start a business by employing others to manage your company.
On the other hand, accounting system is also the important tool for starting a business after you decided the type of your business. An accounting system is the processes and techniques for gathering, categorizing, shortening, and reporting a business's financial and manipulating information. The owner of a company has to understand the profits and assets he owns and the liabilities that he owed to the others. Regarding accounting systems, it may help the owner to record and keep overall the business transactions systematically. Thus, an accounting system is to let the businessman to operate his business easily and smoothly.
There are two types of accounting systems which is manual and computerized accounting system. The advantage of manual accounting system is cost savings because the computerized accounting system is quite expensive. The owner may save the costs by doing the accounting manually. Besides, the owner may do manual accounting with freedom in anywhere and anytime instead of computerized accounting system by using computer. On the other hand, the benefits of computerized accounting system are time savings and speed, accuracy, cost savings, automatic document production, management information and up-to-date information. Firstly, it can save a lot of time with fewer mistakes. Furthermore, data entry against the computer with its formatted screens and built-in databases of customers and supplier information and stock records can be carried out far more quickly than any manual processing. Moreover, there is less opportunity for mistakes as only one accounting entry is required for each transaction rather than two or three for a manual system. Although the cost of purchasing system is expensive the owner can save money from employing staffs to do audit. Speedy and precise invoices, credit notes, purchase orders, printing statements and payroll documents are all done automatically. In addition, monthly reports can be formed by the management information which will help managers to observe and organize the business. Lastly, all the accounting records and account balances are mechanically updated. I would advise you to consider and choose the computerized accounting system instead of choosing the manual accounting system. For your sole proprietorship business, it is weird that I asked you to choose this as you do not have any accounting basis. However, if I am not mistaken, you may ask your wife to help you to do accounting daily work as an accountant. Computerized system may help your wife to handle it easily and accurately because she still can handles the other company's accounts.
The flow chart shown as above is accounting process which is the sequences of activities beginning with transaction and ends with the closing of the books for your references. There are nine steps in this cycle which are gathering and evaluating data from transactions and procedures, putting those transactions into the general journal, posting entries to the general ledger, preparing an unadjusted trial balance, adjusting entries properly, preparing an adjusted trial balance, classifying the accounts into the financial statements, closing the books and last preparing a post-closing trial balance to check the accounts.
Total Assets = Total Liabilities + Shareholders' Equity
The income statement is a statement of financial performance while the balance sheet is a statement of financial position. I agree with this statement. Income statement reports the transform in financial circumstance because of the procedures of a business. The general aim of it is to determine a company's financial performance over a specific accounting period, always is one year. However, the time period enclosed by the income statement may vary depending upon the needs of the stakeholders. Income statement will show the net profit or loss of the business in that accounting period as well. Public corporations are required to file quarterly and annual income statements with the Securities and Exchange Commission (Carl S. Warren, Survey of Accounting).
However, balance sheet is the financial statement summarizes a company's assets, liabilities and capital, which also known as shareholder's property at an exact point in time. These three balance sheet parts let investors know about the company owns and owes, as well as the amount invested by the shareholders. Besides, there is a formula must be followed in balance sheet as shown as below.
The examples of income statement as below had shown the company's earning and expensing money performances by listing out the amount monthly. However, balance sheet examples had shown the assets, liabilities and shareholder's equity of the company. These three segments of balance sheet represent the financial position of the company as well. Thus, I totally agreed with the statement which said income statement is a statement of financial performance while the balance sheet is a statement of financial position.
Example of income statement
Example of income statement 2
Example of Balance SheetBalance_sheet1_450.jpg
Example of Balance Sheet 2
Financial statement analysis is the method of valuating relationships among financial statement essentials and making comparisons with related information. It is a useful tool for investors, financial analysts, creditors and others in their decision-making processes related to stocks, bonds, and other financial instruments. The purpose of analyzing financial statements is assessment of previous performance and current financial position and to make predictions about the future performance of a company. Besides, three major types of financial statement analysis are generally acknowledged as horizontal analysis, vertical analysis, and ratio analysis.
There are many users of accounting information which can be categorized by internal and external users. For internal users, accounting information normally shows in the form of management accounts, budgets, forecasts and financial statements. Internal users are management, employees, and owners. Management has to examine the organization's performance and position and taking proper actions to develop the company for future planning, new staffing and controlling. All these decisions are exaggerated companies' product prices, company's product cost, salary and profit margin; they can find these details after study accounting information. Besides, employees have to assess the performance of management and it related to their remuneration and job security. So they use accounting information as well, if company's financial statement shows a large amount of profit, then employees can demand more salary, bonus and incentives. Furthermore, owners have to analyze the profitability of their investment and determine any future course of action. They need accounting information to know whether they have obtained appropriate return on investment. However, external users are investors, financial institutions and government. Investors used the financial statements to judge the financial power of a company to make reasonable investment decisions. Besides, financial institutions that are also known as the loan creditor group would consider on the current and future profitability and growth prospects of the entity. Besides, government will examine whether the tax paid by them is precise and is in line with their financial power. So, after read-through the level of earning of company, they have to amend tax rates.
The Accounting Cycle10677016-illustration-of-the-accounting-cycle.jpg