Chap 2: The Accounting Information System

Lets begin with the Accounting Information System:-

2 terms you need to know:-

i.Accounting entity concept - Only business activities of the entity is recorded.

ii. Monetary concept- In POA, we only record transactions that can be measured in money value. Other intangibles such as friendship which cannot be measured are not recorded!

2.1 Accounting information system 

2.1.1 -Source document

Source document are the start of the Accounting Information System.

The principal of Historical Costs and Objectivity concept require us to record transactions at their original costs or at the time it was incurred. This costs will not change regardless of any circumstances.

Historical costs ---> Transactions are recorded at the time of the occurence

Objectivity concept --> all transactions should be verifiable and reliable that is supported by source documents, such as invoice, receipts before we should record them.

2.1.2 Journals 

All transactions are first recorded in Journals when we receive the source documents. Lets have a look at the Journals we have.

We have 6 types of Journals : -

• Purchase Journals - To record all Credit purchase of goods frm Supplier's invoices
• Purchase Return Journals- To record all return of credit purchase of goods from Supplier's Credit notes.
• Sales Journals - To record all credit sales of goods from invoices generated from own entity.
• Sales return Journals - To record all credit return of sales of goods from Credit note generated from own entity.
• Cash book - to record all cash and cheques paid and received - can be from customer receipts or bank slips/statement
• General Journals - to record all transactions not recorded in the above 5 journals.

Note: Other than Cashbook and General Journals, the first 4 journals are also called Special Journals.

Example of a recording: - 

Cash - $1000 Received from customers 

Date     Particulars                   Debit                Credit 

20X2    Bank                          1,000  

3 Dec            Customer A                                  1,000

Being cash - $1,000 received from customer A 

2.1.3 Ledgers 

Basically there are 2 types of Ledgers which houses the journals :-

General Ledger ----1. Purchase journals,2 Purchase return journals, 3. Sales Journal , 4.Sales Returns Journal, 5. Cash book and 6 General Journals.

Subsidiary Ledgers --- Trade Receivables Ledger and Trade Payable Leger which comprise of all the individual trade payable and receivable ledger accounts.

An example of a Trade Receivable Ledger: -

An example of a Trade Payable Ledger: -

The total trade receivables ledger and the total trade payable should be equal to the Accounting control accounts in the general ledger accounts.

2.1.4 Trial Balance  

After the journals are recorded and posting to the individual ledgers, a summary of every ledger account balance is prepared. The Summary is called the trial balance. 

If a trial balance does not balance, i.e. the Debit does not equal to Credit, some transactions may not be posted correctly. For e.g, a Credit Sales was recorded as Dr Customer A  Cr Cash at bank when it should be Dr Customer A Cr Sales Revenue. 

In such case the trial balance should still balance, it is a mistake that is revealed by a trial balance which we will be going through in the next chapters. 

2.1.5 Financial Statements

Using the trial balance, we will then prepare the Financial statements - Income Statement and Balance Sheet. which we will be going through in the next few chapters.

Last 2 Accounting theory before we end the chapters: -

Going Concern Theory

The Going Concern concept assumes that the business has an ongoing or indefinite economic life. Human being will pass away but a business doesn't. 

Accounting Period concept 

Accounting Period Concept refers to the common intervals that businesses prepares their financial statement, it can be monthly/Quarterly/Half-yearly or yearly.

Example of exam questions

i. Business transactions can be divided to Credit and Cash transactions.

ii. Give 3 examples of Source documents: - 1. Sales Invoice, 2. Bank Slip and 3. Supplier's credit note. 

iii. Name the 2 types of subsidiary ledgers: 1. Trade Receivables Ledger and 2. Trade Payable Ledger

We offer home based/online tuition for Principles Of Accounts ,call 91786404 or email zhenken86@hotmail.com to find out more:)

Chap 1: Introduction to Accounting

 Welcome to my Principles Of Accounts blog,whether you are a sec 3,4 or 5 candidate or a private candidate,we seek to clear your understanding in POA.

For a start,let's have some introduction to Principles Of Accounts.

1.1 What is accounting ?

Accounting is the recording,summarizing,analysing,interpreting and reporting of business transactions using business report.

Bookkeeping on the other hand is just the recording of business transactions.

1.2 Who is a steward and explain how the stewardship role of accounting results in the results in the creation of an accounting information system.

A steward is someone hired to manage the affairs of the business like an accountant.

As an steward of the business,an accountant is expected to provide it's owner with financial information such as trends, data to help assist the owner decision making.

How the financial information comes about is through a system to collect,record and also report the financial information of the business.This system is called the accounting information system.

1.3 Who are the users of such information,the type of information they are interested in and to use them in which decision making?

Internal Stakeholders

I.Employees-->interested in the cash/profitability-->Employee wants to know if their employability is secured,if am entity is not making money,then their role or Salary is not secured.

II.Sole proprietor and Managers-->interested in almost all information-->Managers require information to make decisions regarding planning budgeting,control and how to account for variance from budgeted and forecast.

External Stakeholders 

I.Investors and shareholders-->Profits,assets,liab and owners equity-->Prospective would-be investors would want to know the company's profits,it's debt obligation and the ability to generate profit before they are able to make an informed decision whether to invest in the company.

II.Suppliers -->Profit and cashflow--->Suppliers would want to know the ability of the company to repay their debts of they decided to supply goods to the Company.

III.Bank and lenders-->Profits,asset and Liab-->Lenders would assess if the company gearing,debt ratio are suitable before they lend funds to the entity.The income statement also tells the lenders if the company has profits/cashflow from their mode of business.

1.4 Professional ethics 

As you saw above,there are many stakeholders who uses the financial report to make decision.

A biased financial report could cause bad financial decision being made which could result in losses 

Henceforth,accountant should have a high standard of professional ethics which are the 2 points below:-

• Integrity- to be straightforward and honest in all professional and business relationship.
• Objective-to be unbiased when one is making a professional judgement in the accounting process.

1.5 Trading vs Service businesses 

Trading Services

-Do not hold stock,or hold minimal stock to perform their trade.

-Labour costs are the highest type of costs 

Service Business 

-Holds inventory/stock,usually have opening and closing inventory.

-Inventory/stock costs make up the highest costs component in their profit and loss.

1.6 Sole Proprietorship vs Company 

Sole proprietor 

+1 owner only 

+The sole proprietor handle the affairs of the business solely.

+The sole proprietor has to account for all the debt on its own.

Company

+Private company has max 50 shareholders while a public company has no limit.

+Shareholders are only involved in yearly annual general meeting,the daily operations are left to professionals to run the company.

+A company debt is limited to the debt that is invested in the company.

Advantage and disadvantage of a company vs a sole proprietorship 

A sole proprietorship is easier to set up and less regularities to conform to.

A sole proprietor has more difficulties in sourcing for funds whereas a company can raise through bonds,notes or issuance of shares.

Example of exam questions

i.State 2 advantages of a sole trader and 2 advantages of a limited company.

ii.State 2 professional ethics attribute an accountants need to have.

iii. Name 2 stakeholders who are interested in a company's profit & cashflow and the reason.

We offer home based/online tuition for Principles Of Accounts ,call 91786404 or email zhenken86@hotmail.com to find out more:)