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.
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.
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
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