Accounting Practice

WHAT IS ACCOUNTING?

Accounting is the process of recording, classifying and summarising financial information collected by bookkeepers for analysis and interpretation. It provides guidance in making business decisions and provides useful economic information to interested parties and users who depend on these results.

WHAT IS BOOKKEEPING?

Bookkeeping is the detailed and accurate recordind of all transactions which take place in a business. It is necessary to record the date, nature and value (in money terms) of the transaction. Bookkeeping records provide the information from which financial accounts are prepared.

Role of the bookkeeper

Source documents arise as a result of transactions. It is the task of the bookkeeper to convert financial data gathered from source documents into useful economic information. This is done by:

- identifying source documents resulting from the transactions

- recording and summarising details in journals

- classifying the information from the journals in the ledger.

Once the information has been collected, recorded and arranged in a meaningful way by the bookkeeper, it is used by the accountant to prepare accounting reports. These reports assist management in planning for and controlling an organisation and are also communicated to outside users such as shareholders and potential investors to assist with economic decision - making.

Objectives of bookkeeping

Bookkeeping is the process of maintaining a clear, concise and permanent record of all transactions as they occur, to assist the owner/s of the business to ascertain:

- amounts owing to the business by debtors

- amounts owed to creditors

- amounts of losses and gains in a particular accounting period and the reasons for these

- flow of cash and goods, both into and out of the business

- nature and amount of what the business owns or what is owed to the business (assets)

- nature and amount of what the business owes (liabilities)

- the amount of owner’s equity (capital, proprietorship) that the owner has invested in the business

- the overall financial standing of the business at a given date.

FUNCTION OF ACCOUNTING

Accounting is concerned with the economic activities of a business. Accounting involves gathering information, processing it and reporting on it to management and other interested users. This information is used to evaluate past economic events, control current economic activities and make economic decisions and plans for the future.

ACCOUNTING CONCEPTUAL FRAMEWORK

Over the years, the accounting profession evolved without a defined set of guiding principles. Confusion often arose as different firms used veryind methods to correct similar problems. This made comparison of financial reports between companies and over time difficult, as information was interpreted in different ways by different people. For these reason, c conceptual framework, in the form of a number of concept statement, is being developed to provide a set of guiding principles for the accounting profesion.

Accountants themselves have developed traditional ways of doing things. This is reflected in the Accounting Conventions, which are generally accepted accounting principles which have been used for many years. These conventions (or accepted practices) include those described below.

Accounting entity convention

For accounting purposes, the business of a sole trader or a partnership is regarded as a separate accounting entity; that is, a being in it’s own right. Only the transactions of the business or the partnership are recorded. The personal financial dealings of the owner/s are completely separate to, and distinct form, those of the business.

Continuity of activity convention

Under the continuity of activity convention, the business is regarded as an ongoing entity that will continue to operate in the future.