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Even though corporations such as canal companies and banks etc. were located in the U.S prior to the early 1800s, there were not in large amounts, there were just few However There was a rapid increase in the amount of corporations with the creation and development of the railroads. To function successfully, the railroads needed financial statements, cost reports, production reports and operating ratios that were more complicated than simple recording procedures could provide. In 1977 Alfred D. Chandler, Jr., noted the impact of the railroads on the expansion of accounting in his class work. "The visible Hand" where he said "after 1850 the railroad was central in the development of the accounting profession in the United states" (p.110)
Cruder forms of accounting were inadequate for the problems made by a business entity involving a lot of investors, so double entry bookkeeping first emerged in Northern Italy in the fourteen century, where trading ventures began to want more capital than a person as able to invest. The growth of joint stock companies created wider audiences for accounts, as investors without firsthand knowledge of their operation relied on accounts to give the necessary information.
This expansion resulted in where the accounting systems was separated for Internal (Management accounting) and External 9financial accounting) purposes, and subsequently also accounting and disclosure regulations and a expanding need for exempt declaration of external accounts by bookkeepers.
Accounting developed over the years as where the profession now consists of both many men and women employed in public and private industries as well as profit and non-profit organizations as members of management teams or as quality consultants. Today accounting is referred to as "the language of business" because it is the vehicle for declaring financial information about a business entity to various groups of persons. The term management accounting or managerial accounting provides accounting information to help managers make decisions to manage the business and financial accounting is the process of summarizing financial data taken from an organization's accounting records and publishing in the form of annual reports for the benefit of people outside the organization.
Many things about the accounting profession today are quite different from what existed at the beginning. As it has to do with small local firms, changes such as accounting firms today can be large international organizations with published revenues of thousand up to billions of dollars, also as it has to do with a bookkeeper manually recording entries in a large confine volume, the responsibility is now on an accountant for information concerning all facets of a business organization and is very much dependent on the latest technology for processing that information.
The relationship between accounting and bookkeeping
It said that accountants give orders and bookkeepers follow them. Where it has to do with bookkeeping firstly, bookkeepers perform a very serious function for the organizations and the firms they work with, normally challenged to maintain accurate and exact records, they produce very important reports that informs and keep management up to date on the financial condition of the business or on their company
Every business needs a reliable bookkeeping system based on an established accounting principle. Accounting is a broader term than bookkeeping. Bookkeeping is mainly o record keeping aspects of accounting. It is the bookkeeper's responsibility for maintaining the business checkbook, more like a personal checkbook. Customely, bookkeepers record money transactions, for example they record customer payment into a cashbook or cash receipts journal and receipts to vendors recorded into a cash disbursement journal or also the cashbook. Bookkeepers also process payrolls, at the end of the month they post the totals of the journal to the general ledger, in preparation for financial statements that is to be prepared by the accountant.
The term bookkeeping can also be referred to as record keeping and it is the process of accumulating, organizing, storing and accessing the financial information base of a business, it also should be complete, accurate and timely. The financial information base is needed for two simple purposes; facilitating the day to day operations of the business and preparing financial statements, tax returns and internal reports to the manager/s. Every bookkeeping system needs Internal Controls; Internal Controls maybe define as a process affected by an organization's structure, work and authority flows, people and management information system, designed to help the organization accomplish specific goals or objectives
The records were traditionally kept in a book, thus the name bookkeeping, but today, bookkeeping is normally done using a bookkeeping software package, but the names of the books such as cashbook, journal, daybook and ledger are still used.
Now, the accountants design the internal controls for the bookkeeping system, in which minimize errors in recording the large amount of activities that a business engages in over the period and they often specialize in a specific area of accounting such as auditing, management or taxes. The accountants prepare financial statements for each month and tax returns at the end of each year. Loan proposals for bankers and budgets for management may also be prepared by an accountant. The reports that are prepared by the accountants are based on the information collected by the bookkeeping process. Measuring profit is a very serious task that an accountant does, a task that relies on the accuracy of the information recorded by the bookkeeper. The responsibility of the accountant is to decide how to measure the sales revenue and expenses to decide the profit or loss for the period.
Accounting maybe define has the reporting, recording and analysis of financial transactions of a business, it also includes preparation of financial statements that concerns with assets, liabilities and the operating results of the business. The role of bookkeeping is included within the area of accounting, has it involves making a financial record of a business transactions and the bookkeeping system that is used by a business would form part of the accounting system.
In every business they need to choose an annual tax year, the two main options are a Fiscal tax year or a Calendar tax year. A fiscal tax year is twelve consecutive months ending on the last day of any month except from December 31 and a calendar tax year is twelve consecutive months starting at the first of January and ending on the thirty first of December. The most widely used annual tax year by businesses is the calendar tax year. When business activity is low a business might choose to use the fiscal tax year, as they could select an ending month for their fiscal year, hence this makes the process of closing the books a bit easier.
Bookkeeping is like machine work in which bookkeeper passes the vouchers into books.
Accounting work is completely professional and need qualified experience for analysis and interpretation of financial statements.
The most difficult part of bookkeeping work is to reconciliation of bank account with pass book, cash balance with physical cash in hand.
The most difficult work of an accountant is to make final account and analysis of financial statements.
Bookkeeping is just record of transactions
Accounting is recording, analyze and summarizing of business transaction and interpretation of different result.
A bookkeeper always works under head accountant.
Calculation of tax and filling of tax return is part of duties of accountant, but can take help from bookkeeper for tracking the total of the incomes of business.
Relationship between the type of bookkeeping system used and the accounting method used
A business needs to know the type of bookkeeping system that will be used to record their business transactions there are two types, single entry and double entry. Another thing is that a business is faced to make a decision to what accounting/bookkeeping method is going to be used to track expenses and revenues, cash method or accrual method. Bookkeeping and accounting helps each other in many different ways, as where a type of business transaction is used along with an accounting/bookkeeping method.
The single entry system is used along with the cash method of accounting
The double entry system can be used with both the accrual and cash methods
The single entry system is referred to an "informal" accounting/bookkeeping system where users of the system enter a business financial transaction by making only one entry. It usually includes an everyday summary of cash receipts and a monthly record of disbursements and receipts. The name single entry system got its name because an individual records reach transactions only once as either a revenue or as an expense. Even though debits and credits are recording method required for double entry system, they are not used to record a financial event, since each entry is recorded once.
Most small organizations start out using this type of bookkeeping systems, however, for tax purpose, he single entry system can or may be acceptable. Otherwise it does not provide a business with all the financial information that is needed to report the financial affairs of a business. The importance of the single entry system is to determine the profit or loss of a business. An example of a single entry system is a checkbook; a checkbook is where only one entry is made for each check written.
The double entry system is regarded as the best and is widely used by businesses to record financial transactions. All business transactions consist of an exchange of something for another, this is where double entry bookkeeping using both debits and credits is used to clearly show this 'two-fold effect." Debits and credits are the device that allows for recording the entries twice. The double entry system has built in checks and balances, as a result of the use of debits and credits, the double entry system is "self balancing" and hence, the total of the debit amount recorded is equal to the total of the credit amount recorded.
The accrual method of accounting record capital expenditures and expenses in the period incurred and records income in the period earned. The purpose of accrual method is to properly match expenses and income in the right period.
The cash method recognizes revenues in the period the cash is received and expenses in the period when the cash payments are made. There are two types of cash methods, strict and modified cash methods.
The main users of accounting and formation and the purpose of their use
An accounting information system is a system of storage, collection and processing of financial and accounting data that is used by decision makers, it is generally a computer-based method for tracking accounting activity in conjunction with information technology resources. The resulting statistical reports can be used internally by management or externally by other interested parties including creditors, investors and tax authorities. The actual physical devices and systems that allows the accounting information system to operate and perform its functions, in the preparation of accounting information, care should be taken to ensure that the information presents an accurate and genuine view of the organization performance and position. Also accounting information is communicated using financial statements.
Accounting information helps businesses to provide a record of assets owned, amounts owed to others and monies invested, help management/ manage the organization, provide reports showing the financial position of a business and the profitability of its operation, provides a way of measuring a business effectiveness, helps stakeholder monitor a business activities and performance and enables potential investors or funders to evaluate a business and make decisions.
There are many potential users of accounting information; the main users of accounting information are owners/shareholders, investors, lenders, creditors, government, analysts, general public, employees, customers and debtors.
Investors- Investors are concerned about risk and return in relation to their investments. They require information to decide whether they should continue to invest in a business. They also need to be able assess whether a business will be able to pay dividends and to measure the performance of the business management overall.
Lenders- Banks and other financial institutions who lend money to a business require information that helps them determined whether loans and interest will be paid when due.
Creditors- Suppliers and trade creditors require information that helps them understand and assess the short-term liquidity of a business. Is the business able to pay short-term debt when it falls due?
Government- There are many government agencies and departments that are interested in accounting information. For example, the IR&CE needs information on business profitability in order to levy and collect Corporation Tax. Various regulatory agencies (e.g. the Competition Commission and the Environment Agency) need information to support decisions about takeovers and grants, for example.
Analysts- Investment analysts are an important user group - specifically for companies quoted on a stock exchange. They require very detailed financial and other information in order to analyse the competitive performance of a business and its sector. Much of this is provided by the detailed accounting disclosures that are required by the London Stock Exchange. However, additional accounting information is usually provided to analysts via formal company briefings and interviews.
General Public- Interest groups, formed by various groups of individuals who have a specific interest in the activities and performance of businesses, will also require accounting information.
Employees- Employees (and organizations that represent them - e.g. trade unions) require information about the stability and continuing profitability of the business. They are crucially interested in information about employment prospects and the maintenance of pension funding and retirement benefits. They are also likely to interested in the pay and benefits obtained by senior management.
Customers and Debtors- Customers and trade debtors require information about the ability of the business to survive and prosper. As customers of the company's products, they have a
long-term interest in the company's range of products and services. They may even be dependent on the business for certain products or services.
Owner or shareholders - They need accounting information so as to see whether they will be getting adequate return on the capital they have invested in the company.
For accounting information to be useful and used it must be compliant with fundamental accounting assumptions and conventions, it has to be:
Correct - present fairly and correctly results of operations and financial position of the business.
Consistent - presentation and classification of items in the financial statements must be the same from one accounting period to the next.
Prudent - accounting for certain items requires making judgments, these must be made with prudence to ensure assets or income are not overstated, liabilities or expenses are not understated.
Material - material items must be disclosed separately, immaterial items can be aggregated into groups.
Relevant - accounting information must be useful assisting users in their decision making process.
Reliable - free from material mistakes and errors.
Complete - presented without omission of material information.
Comparable - providing ability to compare information through time and with other entities.
Understandable - users without specific accounting knowledge must understand the accounting information.
Record the following transactions for the month of December for ABC Enterprise, balance off the accounts, and extract a trial balance as at 31 December 2011.
Dec 1 Started business with $35000 cash
Dec 2 Put $10,000 of the cash into a bank account
Dec 4 Bought goods for cash $1000
Dec 5 Bought goods on credit from: A. Harris $700; M. Henry $1000; P. Peter $800
Dec 6 Sold goods on credit to: R. Brown $50 and S. White $1000
Dec 8 Paid rent by cheque $2000
Dec 10 Bought fixtures on credit from OBF Ltd $500
Dec 12 Paid salaries in cash $800
Dec 18 Bought a van by cash $7000
Dec 21 Cash sales $500
Dec 24 Sold goods on credit to A. Mitchell $300
Dec 27 Received $1000 cash from S. White
Dec 31 Bal c/d 35000
Dec 1 Capital 35000
Dec 21 Sales 500
Jan 1 bal b/d 15700
Dec 2 Cash 10000
Jan 1 bal b/d 8000
Dec 8 Rent 2000
Dec 31 Bal c/d 8000
Dec 4 Cash 1000
Dec 5 A. Harris 700
Dec 5 M.Henry 1000
Dec5 P.Peter 800
Jan 1 Bal b/d 3500
Dec 31 bal c/d 3500
Dec 31 bal c/d 700
Dec 5 Purchases 700
Jan 1 Bal b/d 700
Dec 31 bal c/d 1000
Dec 5 Purchases 1000
Jan 1 Bal b/d 1000
Dec 31 bal c/d 800
Dec 5 Purchases 800
Jan 1 Bal b/d 800
Dec 31 bal c/d 2300
Dec 6 R. Brown 500
Dec 6 S. White 1000
Dec 21 Cash 500
Dec 24 A. Mitchell 300
Jan 1 Bal b/d 2300
Dec 6 Sales 500
Jan 1 Bal b/d 500
Dec 31 Bal c/d 500
Dec 6 Sales 1000
Dec 27 Cash 1000
Jan 1 Bal b/d 2000
Dec 31 Bal c/d 2000
Dec 8 Bank 2000
Jan 1 Bal b/d 2000
Dec 31 Bal c/d 2000
Dec 10 OBF ltd. 500
Jan 1 Bal b/d 500
Dec 31 Bal c/d 500
OBF Ltd. A/C
Dec 31 Bal c/d 500
Dec 10 Fixtures 500
Jan 1 Bal b/d 500
Dec 12 Cash 800
Jan 1 Bal b/d 800
Dec 31 Bal c/d 800
Dec 18 Cash 7000
Jan 1 Bal b/d 7000
Dec 31 Bal c/d 7000
Dec 24 Sales 300
Jan 1 Bal b/d 300
Dec 31 Bal c/d 300
As at 31 Dec.2011
A. Harris 700
M. Henry 1000
P. Peter 800
R. Brown 500
S. White 2000
OBF Ltd. 500
A. Mitchell 300