Free Finance and Accounting Essay Sample
Accounting is a systematic process of recording, reporting and evaluating of financial transactions (Bushman, et al., 2004). Business organizations have to communicate financial information to various users such as managers and shareholders through following stipulated requirements and documents. The financial statements used in accounting show the monetary value of resources that are under control of the business organization. A financial accountant oversees the accounting process by adhering to specified accounting rules. Some of the significant purpose of integrating accounting in businesses is to provide financial information for making sound economic decisions and generate financial reports (Fields, 2011). The prepared financial reports indicate the company’s performance in the external economic environment such as investors, tax authorities and creditors. With the established definition of accounting, this study proceeds to explain the six types of accounting that include petty cashbook, ledger, journal, balance sheet, income statement and the cashbook. In addition, it explains accounting records and their uses.
The petty cash book is a record in the form of a book that keeps petty cash expenditures (Sawani, 2010). Many business organizations find necessary to keep relatively small amounts of money, petty cash, with their cashier for purposes of spending on telegrams, office sundries and stationary. Petty cash books have two sides, which are the debit and credit, for recording small payment records (Weaver & Weston, 2004). The debit side of the petty cash book has only one money column, which records the money received by the cashier. The credit side is divided into various analysis columns for recording expenses. The expenses made by the cashier are recorded twice in the credit side of the petty cash. First, the expense is recorded in the total column then to suitable column related to the expense. The posting of total expenses to their respective ledger accounts is on monthly or fixed period basis.
Most essentially, some businesses maintain petty cash book by using the imprest system. A fixed amount of money is given to the cashier to meet the petty expenses for a month. Under this system, the petty cashier submits the petty cash statement to the chief cashier, who reimburses the exact sum of money spent during that month (Bushman, et al., 2004). The imprest system is beneficial in that it acts as a healthy tool for monitoring expenses. Examples of petty cash book include the simple and analytical petty cash books. The simple, petty cash book allocates one column to amount cash in all sides. It also has other additional columns, such as the date column. The analytical petty cash book comprises of a single amount column in the debit side and various columns in the credit side (Weaver & Weston, 2004).
A ledger is an accounting book that records all accounts that relate to assets, liabilities, capital, revenues and expenses (Sawani, 2010). The book is usually page numbered consecutively and might be well-bound sheets of paper. The ledger is a book of final entry, because it makes available postings of business transactions recorded in the journal and other purpose books with initial entries. Notably, it serves as a referencing system of accounting, classifies, and summarizes transactions to allow generation of financial statements. The ledger is advantageous because it provides information concerning revenues and expenses that are essential in knowing business results (Sawani, 2010). In addition, the ledger records asset values separately; hence, reveals the book value of all assets. Examples of ledgers include, but not limited to the general ledger and creditors ledger. The general ledger maintains unrecorded accounts that are not in any ledger. Creditors’ ledger records all transactions of trade creditors, who are parties from that offer goods to the business on credit.
Journals are books of accounting that record all financial transactions (Bushman, et al., 2004). The maintenance of transactions in the journal uses a chronological format. This implies that all transactions recorded in source documents should also appear in the general ledger. The chronological arrangement of transactions shows the amounts, affected accounts by the transactions and the direction of accounts after the effect. Journals have four principal columns that are date, accounts, debit and credit. The reference column, though not necessary, is present in some journals. The date columns indicate the date of the transaction; the accounts column indicates the affected accounts and the debit and credit columns show the direction of the affected accounts (Sawani, 2010). Examples of journals include, but are not limited to purchases and cash payment journal. The purchases journal records all transactions of items purchased on open account and it affected by almost all transactions. The cash payment journal records all payments made by the business.
Balance sheets are financial records that summarize the assets, liabilities and equity of shareholder at a given time. Balance sheets preparations take place at the end of the trading period or at any moment when it is essential. The three inclusions of balance sheets, liabilities, assets and shareholders’ equity indicate the capital of the business and what is owed. The common formula for computing business assets is shown below (Fields, 2011).
Assets = Liabilities + Shareholders’ Equity
The term balance sheet is used because the two sides, credit and debit, must be equal to show the balance. For example, when the company makes a credit purchase of an asset, the assets increase as the creditors increases. The effect of a transaction on the balance sheet is recorded twice to adhere to the principle of double entry. The values of the three compositions of the balance sheets are extracted from their respective accounts. The asset side of the balance sheet comprises of items such as cash and business property. The liability column consists of long-term debts or accounts payable (Fields, 2011).
Examples of balance sheets include the personal and small business balance sheets. Personal balance sheets are produced by listing the values of cash in transactional and savings account; long-term assets such as real estate and common stock; current liabilities such as mortgages and loan debts that are due; and long-term liabilities such as mortgages and loans. The small business balance sheet are produced by listing assets such as the debtors and fixed assets such as buildings, machinery, land and patents.
The income statement or profit and loss account is an accounting statement that shows how the company’s income or revenue is transformed to net income (Fields, 2011). In this context, revenue refers to the actual amount of cash received from the sale of products or services. Net income is the resultant amount received from the sale of product or service after the deduction of expenses. The primary objective of preparing profit and loss statement is to indicate profit or loss made by the business. The income statement is prepared to reflect a given time interval, which is normally limited to one year (Bushman, et al., 2004).
There are two types of income statements namely single-step and multi-step income statements. In single-step income statement, revenue items are listed separately from expenses. The total revenue minus total expenses gives the net income (Fields, 2011). The multi-step income statement is complex, since it involves the incorporation of other intermediary indicators such as gross profit and operating income (Weaver & Weston, 2004). Gross profit is found by subtracting stock expenses from sales revenue. Operating income is reached by subtracting operating expenses from the last item. The computation proceeds to calculate pretax income, found by subtracting and adding non-operating items (Fields, 2011). Subtracting of fiscal dues from pretax income, as a result, give net income.
Cashbook is a financial statement that records cash receipt and cash payment transactions of a business (Bushman, et al., 2004). Additionally, it serves as a book of original entry. The initial financial statement in the cashbook is normally the bank balance at the commencement of a trading period (Weaver & Weston, 2004). New businesses have no bank balance indicated on their cashbook during the starting period. However, firms that use the cashbook should not record cash transactions in their journals and maintain cash or bank accounts in the ledger. Examples of cashbooks are simple and bank column cashbooks (Bushman, et al., 2004).
A simple, cashbook has the debit and credit sides for recording cash receipts and cash payments (Bushman, et al., 2004). The debit side records cash receipt transactions, whereas the credit side records outgoing cash payments. The two sides have date, particulars, and ledger folio and amount columns. Date column indicates the date of the transaction. The particulars columns record the name of the account affected by the cash transaction. The ledger folio column shows the page of the ledger book (Bushman, et al., 2004). The amount received or paid is recorded under the amounts columns.
Accounting records refer to information and proofs used in preparation, verification and or auditing of financial statements (Bushman, et al., 2004). To some extent, accounting records constitute documents that prove ownership of assets and evidence of non-monetary and monetary business transactions. Accounting records include ledgers, bank statements, invoices, vouchers, receipts, contacts and agreements, and journal. These records are either physical or electronic, in nature (Bushman, et al., 2004). Various nations have accounting bodies that are responsible for prescribing regulations concerning accounting. The rules are applicable through the whole process, from preparation to auditing of financial statement. In the United State, the IRS suggests the period, for which accounting records should be maintained.
Functions of Accounting and Accounting Records
Accounting has various roles such as recording, classifying and analysis of financial statements (Bushman, et al., 2004). The recording role of accounting is concerned with ensuring that every transaction is recorded in a chronological manner. Classification ensures that transactions or entries are grouped after being analyzed systematically. Classification of transactions is performed in the ledger. Analysis and interpretation of financial statement is the final function of accounting. The recorded and classified information is scrutinized and interpreted to be understood by shareholders and other end users.
Accounting records are significant when companies are seeking loans to expand their business (Fields, 2011). Financial institutions use the information in accounting records to assess the financial status of the company. Other financial institutions demand business plan before making decisions.
Another role of accounting records is to inform investors of their cash flow (Fields, 2011). Companies need to know the amount of cash available to pay creditors, employees and other expenses. Accounting records can reveal the solvency or insolvency of the business, which influences the business owner to make appropriate decisions.
In conclusion, the accounting is a systematic recording, reporting and evaluation of business transactions. Accounting records include petty cashbook, ledger, journal, balance sheet, income statement and the cashbook. The petty cash book is a record in the form of a book that keeps petty cash expenditures. Ledgers are accounting books that record all accounts that relate to assets, liabilities, capital, revenues and expenses. Examples of journals include, but not limited to purchases and cash payment journal. Balance sheets are financial records that summarize the assets, liabilities and equity of shareholder at a given time. Accounting has various roles such as recording, classifying and analysis of financial statements, as a decision-making tool for various users.