Small Business Record Keeping

Published on May 2016 | Categories: Types, Business/Law | Downloads: 26 | Comments: 0 | Views: 161
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Record keeping for small businesses

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SMALL BUSINESS RECORD KEEPING The record keeping systems found in practice range from the simple to the sophisticated. The various type of accounting practices adopted by small businesses includes the following: The “Envelope” System The record keeping process of most small business that attempt to keep some form of records often consists of saving check stubs, invoices and other documents in brown envelopes which they hand over to their accountant at the year end. The “envelope” system can be further subdivided into: 1. The multiple envelope system In this organization, the documents for each type of transaction are kept in separate envelopes. The documents are properly batched and labeled. 2. The single envelope system The documentation for all the company’s transactions are kept in the same envelope. There is no separation or classification of the documents into transaction type. 3. The incomplete envelopes The documentation is incomplete and disorganized.

The Accounting Information System
Classifying Summarizing Organizing

Events & Transactions

Recording

Data Bank

Information

Accounting is an information and measurement system that identifies, records and communicates relevant, reliable and comparable information about an organization’s economic activities. The aim of accounting is to provide verifiable information about what a business owns, what it owes and how it has performed.
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Accounting is about the collection, presentation and interpretation of economic data. Bookkeeping or Record keeping is the basic first step to providing accounting data. It records the two sides of a financial transaction between the company and an external party (e.g. Cash withdrawal and Purchase of goods) A good bookkeeping system is characterized by simplicity, accuracy, timeliness, consistency, understandability, reliability and completeness.

The Financial Transaction Financial transactions normally have the following characteristics: o The event must involve an Exchange of goods, money, or other items of economic value o The exchange must be between the company and an External party o Documentation must be generated as Evidence of the transaction o The transaction must me quantifiable in Monetary terms Steps in Recording Transactions STEPS 1. Establish the event or transaction and identify the relevant account 2. Confirm whether the transaction is a withdrawal (credit) or deposit (debit) of cash 3. Record the transaction into the accounting journal EXAMPLE Taxi fare (Account name: Transportation)

Expenditure/withdrawal

Record withdrawal of cash (credit cash account) Record expenditure on transportation (debit transportation account)

Some forms of documentation used in recording transactions are:  Receipts  Vouchers  Invoices

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 Debit and Credit notes  Delivery notes  Tickets  Banking tellers and cheque books The documents are always dated and securely stored

The Accounting Cycle  Transaction that occur are evidenced by source documents (e.g. an invoice: sale to Mr. Smith: =N=20,000)  The transaction is recorded in a journal (Mr Smith: =N=20,000)  The journal entries in the individual accounts are summarized in a book of accounts known as a General ledger (e.g. summary of all debtors including Mr. Smith) The general ledger is classified into five sets of accounts: 1. Assets (what the business owns) 2. Liabilities (what the business owes) 3. Capital (equity) 4. Sales (income earned) 5. Expenses (expenditure incurred)  All ledger accounts are listed in a summary form known as the Trial balance (eg. Cash, debtors, creditors etc) These accounting entries are recorded and periodically summarized in the form of the financial statements.

The Financial Statements The three principal financial statements are: 1. The Balance Sheet 2. The Profit and Loss Account 3. The Cash Flow Statement (Published with accompanying notes to the accounts)

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Users of Financial Statements These include investors, creditors, employees, government, regulatory bodies, others (e.g. competitors)

Preparation of financial statements The figures in the financial statement arise as follows: Business strategy ---> Business decisions ---> Business transactions ---> Accounting transactions ---> Accounting entries The preparation of financial statements is moderated by:  Regulations: rules governing the preparation of financial statements o Companies and Allied Matters Act 1990 (CAMA 1990) regulates setting up and operation of limited liability companies o Professional Accounting Bodies: Statement of Accounting Standards (SAS) uniformity accounting reporting practices; Generally Accepted Accounting Principles (GAAP) o Others: International Accounting Standards  Concepts: broad assumptions underlying preparation and presentation of financial statements o The Entity: the company is a separate entity from the its owners and other firms o Cash Vs Accrual: includes timing & matching of revenues and expenses o Objectivity: complete, Unbiased, quantifiable transactions o Prudence o Going concern: he business will continue in operation indefinitely o Consistency o Materiality  Policies: Specific accounting bases, rules and procedures chosen by a company as most appropriate to their business, e.g. inventory valuation. The company’s policies must be disclosed by way of note to the accounts.

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The Balance Sheet The balance sheet tells you where your business stands as of the date you specify. It shows the financial strength (financial position) of the company. It is also a summary of the resources and the sources of capital i.e. what you own and what you owe The balance sheet can be represented as: Resources = Sources of capital

ASSETS = (What you own) Income generating resources

LIABILITIES + OWNERS EQUITY (What you owe)

Further illustrated as: ASSETS LIABILITIES & OWNERS EQUITY

Current Assets

Current Liabilities

Long-Term Liabilities Fixed Assets Owners Equity & Reserves

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Some typical items that make up the Current Assets are cash, inventory, accounts receivable, prepayments Fixed Asset items, include the cost motor vehicles, equipment, fixtures & fittings, net of depreciation (i.e. a provision for the wear and tear of the item over time) Examples of Current Liabilities (amounts due within one year) are accounts payable, bank overdraft, accrued expenses Long-Term Liabilities are long-term loans due after one year Shareholders Funds can be divided into contributed capital and earned capital (retained earnings)

The Profit and Loss Statement The profit and loss statement, also known as the income statement, tells you how much money you have made or lost within a specified period. It shows the financial performance (i.e. the results of operations). Revenue minus Expenses = (Receipt) (Expenditure) PROFIT (surplus) or LOSS (deficit)

All costs incurred in generating revenue must be allocated in order to know if the transaction was at a profit or loss

The Cash Flow Statement This statement summarizes the movements of cash in and out of the company during the period i.e. the sources from where cash was generated by the company and how it was used. It shows the ability of the company to survive by highlighting the results of three activities generating cash flows: o Operating activities o Investing activities o Financing activities

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The Usefulness of the Financial Statements Financial statements are the scorecard of the business. They provide information about the firm’s performance, problems and prospects. The published statements always include the auditors report to the members of the company, stating their opinion on the “truth and fairness” of the view of the company as given in the financial statements

The Limitations of the Financial Statements  Accounting reports are based on, and are limited by, the data collected.  The different accounting methods used by companies affects comparability even within the same industry  Financial statements are historic. They reflect past performance and events. They should not be interpreted in isolation of other information  The different accounting methods used by companies affects comparability even within the same industry  Financial statements are historic. They reflect past performance and events. They should not be interpreted in isolation of other information

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