Understanding Business Accounting For Dummies, 2nd Edition by Colin Barrow, John A. Tracy
Authors: Colin Barrow, John A. Tracy
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system is working well, and analysing and verifying the recorded information. Bookkeepers follow orders; accountants give orders.
Accounting can be thought of as what goes on before and after bookkeeping. Accountants prepare reports based on the information accumulated by the bookkeeping process - financial statements, tax returns, and various confidential reports to managers. Measuring profit is a very important task that accountants perform, a task that depends on the accuracy of the information recorded by the bookkeeper. The accountant decides how to measure sales revenue and expenses to determine the profit or loss for the period. The tough questions about profit - where it is and what it consists of - can't be answered through bookkeeping alone.
The rest of this book doesn't discuss bookkeeping in any detail - no talk of debits and credits and all that stuff. All you really need to know about bookkeeping, as a business manager, is contained in this chapter alone.
Pedalling through the Bookkeeping Cycle
Figure 2-1 presents an overview of the bookkeeping cycle side-by-side with elements of the accounting system. You can follow the basic bookkeeping steps down the left-hand side. The accounting elements are shown in the right-hand column. The basic steps in the bookkeeping sequence, explained briefly, are as follows. (See also ‘Managing the Bookkeeping and Accounting System,' later in this chapter, for more details on some of these steps.)
1. Record transactions - the economic exchanges between a business and the other persons and businesses that the bookkeeper's business deals with.
Transactions have financial effects that must be recorded - the business is better off, worse off, or at least ‘different off' as the result of its transactions. Examples of typical business transactions include paying employees, making sales to customers, borrowing money from the bank, and buying products that will be sold to customers. The bookkeeping process begins by identifying all transactions and capturing the relevant information about each transaction.
Figure 2-1: The basic steps and sequence of the bookkeeping cycle, including the accounting inputs and outputs.
2. Prepare and collect source documents - transaction documentation that the bookkeeper uses to record the transactions.
When buying products, a business gets a purchase invoice from the supplier. When borrowing money from the bank, a business signs for an overdraft , a copy of which the business keeps. When a customer uses a credit card to buy the business's product, the business gets the credit card slip as evidence of the transaction. When preparing payroll cheques, a business depends on salary schedules and time cards. All of these key business forms serve as sources of information into the bookkeeping system - in other words, information the bookkeeper uses in recording the financial effects of the transaction.
3. Record original entries (the financial effects of the transactions) into journals and accounts.
Using the source document(s) for every transaction, the bookkeeper makes the first, or original, entry into a journal and then into the business's accounts. Only an official, established book of accounts should be used in recording transactions. A journal is a chronological record of transactions in the order in which they occur - like a very detailed personal diary. In contrast, an account is a separate record for each asset, each liability, and so on. One transaction affects two or more accounts. The journal entry records the whole transaction in one place; then each piece is recorded in the two or more accounts changed by the transaction.
Here's a simple example that illustrates recording of a transaction in a journal and then posting the changes caused by the transaction in the accounts. Expecting a big demand from its customers, a retail bookshop purchases, on credit, 50 copies of Understanding Business Accounting For Dummies from
Accounting can be thought of as what goes on before and after bookkeeping. Accountants prepare reports based on the information accumulated by the bookkeeping process - financial statements, tax returns, and various confidential reports to managers. Measuring profit is a very important task that accountants perform, a task that depends on the accuracy of the information recorded by the bookkeeper. The accountant decides how to measure sales revenue and expenses to determine the profit or loss for the period. The tough questions about profit - where it is and what it consists of - can't be answered through bookkeeping alone.
The rest of this book doesn't discuss bookkeeping in any detail - no talk of debits and credits and all that stuff. All you really need to know about bookkeeping, as a business manager, is contained in this chapter alone.
Pedalling through the Bookkeeping Cycle
Figure 2-1 presents an overview of the bookkeeping cycle side-by-side with elements of the accounting system. You can follow the basic bookkeeping steps down the left-hand side. The accounting elements are shown in the right-hand column. The basic steps in the bookkeeping sequence, explained briefly, are as follows. (See also ‘Managing the Bookkeeping and Accounting System,' later in this chapter, for more details on some of these steps.)
1. Record transactions - the economic exchanges between a business and the other persons and businesses that the bookkeeper's business deals with.
Transactions have financial effects that must be recorded - the business is better off, worse off, or at least ‘different off' as the result of its transactions. Examples of typical business transactions include paying employees, making sales to customers, borrowing money from the bank, and buying products that will be sold to customers. The bookkeeping process begins by identifying all transactions and capturing the relevant information about each transaction.
Figure 2-1: The basic steps and sequence of the bookkeeping cycle, including the accounting inputs and outputs.
2. Prepare and collect source documents - transaction documentation that the bookkeeper uses to record the transactions.
When buying products, a business gets a purchase invoice from the supplier. When borrowing money from the bank, a business signs for an overdraft , a copy of which the business keeps. When a customer uses a credit card to buy the business's product, the business gets the credit card slip as evidence of the transaction. When preparing payroll cheques, a business depends on salary schedules and time cards. All of these key business forms serve as sources of information into the bookkeeping system - in other words, information the bookkeeper uses in recording the financial effects of the transaction.
3. Record original entries (the financial effects of the transactions) into journals and accounts.
Using the source document(s) for every transaction, the bookkeeper makes the first, or original, entry into a journal and then into the business's accounts. Only an official, established book of accounts should be used in recording transactions. A journal is a chronological record of transactions in the order in which they occur - like a very detailed personal diary. In contrast, an account is a separate record for each asset, each liability, and so on. One transaction affects two or more accounts. The journal entry records the whole transaction in one place; then each piece is recorded in the two or more accounts changed by the transaction.
Here's a simple example that illustrates recording of a transaction in a journal and then posting the changes caused by the transaction in the accounts. Expecting a big demand from its customers, a retail bookshop purchases, on credit, 50 copies of Understanding Business Accounting For Dummies from
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