Understanding Business Accounting For Dummies, 2nd Edition by Colin Barrow, John A. Tracy Page B
Authors: Colin Barrow, John A. Tracy
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contrast, external financial statements, tax returns, and internal accounting reports to managers contain a relatively small number of accounts. For example, a typical external balance sheet reports only 20 to 25 accounts, and a typical income tax return contains less than 100 accounts.
The accountant takes the adjusted trial balance and telescopes similar accounts into one summary amount that is reported in a financial report or tax return. For example, a business may keep hundreds of separate stock accounts, every one of which is listed in the adjusted trial balance. The accountant collapses all these accounts into one summary stock account that is presented in the external balance sheet of the business.
In short, the large number of specific accounts listed in the adjusted trial balance is condensed into a comparatively small number of accounts that are reported in financial statements and tax returns. In grouping the accounts, the accountant should comply with established financial reporting standards and income tax requirements.
6. Close the books - bring the bookkeeping for the fiscal year just ended to a close and get things ready to begin the bookkeeping process for the coming fiscal year.
Books is the common term for accounts . A business's transactions are a constant stream of activities that don't end tidily on the last day of the year, which can make preparing financial statements and tax returns challenging. The business has to draw a clear line of demarcation between activities for the year (the 12-month accounting period) ended and the year yet to come by closing the books for one year and starting with fresh books for the next year.
The business may have an accounting manual that spells out in great detail the specific accounts and procedures for recording transactions. But all businesses change over time, and they occasionally need to review their accounting system and make revisions. Companies do not take this task lightly; discontinuities in the accounting system can be major shocks and have to be carefully thought out. Nevertheless, bookkeeping and accounting systems can't remain static for very long. If these systems were never changed, bookkeepers would still be sitting on high stools making entries with quill pens and ink in leather-bound ledgers.
Managing the Bookkeeping and Accounting System
In our experience, far too many business managers either ignore their bookkeeping and accounting systems or take them for granted - unless something obvious goes wrong. The managers assume that if the books are in balance, then everything is OK. The section ‘Recording transactions using debits and credits', later in this chapter, covers just exactly what ‘the books being in balance' means - it does not necessarily mean that everything is OK.
To determine whether your bookkeeping system is up to scratch, check out the following sections, which, taken as a whole, provide a checklist of the most important elements of a good system.
Categorise your financial information: The chart of accounts
Suppose that you're the accountant for a company and you're faced with the daunting task of preparing the annual income tax return for the business. This demands that you report the following kinds of expenses (and this list contains just the minimum!):
Advertising
Bad debts
Charitable contributions
Compensation of directors
Cost of goods sold
Depreciation
Employee benefits
Interest
Pensions and profit-sharing plans
Rents
Repairs and maintenance
Salaries and wages
Taxes and licenses
You must provide additional information for some of these expenses. For example, the cost of goods sold expense is determined in a schedule that also requires stock cost at the beginning of the year, purchases during the year, cost of labour during the year (for manufacturers), other costs, and stock cost at year-end.
Where do you start? Well, if it's March 1 and the tax
The accountant takes the adjusted trial balance and telescopes similar accounts into one summary amount that is reported in a financial report or tax return. For example, a business may keep hundreds of separate stock accounts, every one of which is listed in the adjusted trial balance. The accountant collapses all these accounts into one summary stock account that is presented in the external balance sheet of the business.
In short, the large number of specific accounts listed in the adjusted trial balance is condensed into a comparatively small number of accounts that are reported in financial statements and tax returns. In grouping the accounts, the accountant should comply with established financial reporting standards and income tax requirements.
6. Close the books - bring the bookkeeping for the fiscal year just ended to a close and get things ready to begin the bookkeeping process for the coming fiscal year.
Books is the common term for accounts . A business's transactions are a constant stream of activities that don't end tidily on the last day of the year, which can make preparing financial statements and tax returns challenging. The business has to draw a clear line of demarcation between activities for the year (the 12-month accounting period) ended and the year yet to come by closing the books for one year and starting with fresh books for the next year.
The business may have an accounting manual that spells out in great detail the specific accounts and procedures for recording transactions. But all businesses change over time, and they occasionally need to review their accounting system and make revisions. Companies do not take this task lightly; discontinuities in the accounting system can be major shocks and have to be carefully thought out. Nevertheless, bookkeeping and accounting systems can't remain static for very long. If these systems were never changed, bookkeepers would still be sitting on high stools making entries with quill pens and ink in leather-bound ledgers.
Managing the Bookkeeping and Accounting System
In our experience, far too many business managers either ignore their bookkeeping and accounting systems or take them for granted - unless something obvious goes wrong. The managers assume that if the books are in balance, then everything is OK. The section ‘Recording transactions using debits and credits', later in this chapter, covers just exactly what ‘the books being in balance' means - it does not necessarily mean that everything is OK.
To determine whether your bookkeeping system is up to scratch, check out the following sections, which, taken as a whole, provide a checklist of the most important elements of a good system.
Categorise your financial information: The chart of accounts
Suppose that you're the accountant for a company and you're faced with the daunting task of preparing the annual income tax return for the business. This demands that you report the following kinds of expenses (and this list contains just the minimum!):
Advertising
Bad debts
Charitable contributions
Compensation of directors
Cost of goods sold
Depreciation
Employee benefits
Interest
Pensions and profit-sharing plans
Rents
Repairs and maintenance
Salaries and wages
Taxes and licenses
You must provide additional information for some of these expenses. For example, the cost of goods sold expense is determined in a schedule that also requires stock cost at the beginning of the year, purchases during the year, cost of labour during the year (for manufacturers), other costs, and stock cost at year-end.
Where do you start? Well, if it's March 1 and the tax
Similar Books
