Accounting is a crucial requirement that used by individuals and business organization. It involves the activity in recording the financial transactions and measures the financial activities who’s the person is named accountant. It is the language of a business that includes many aspects. Those who rely on financial information include internal users such as employees and managers while for external users are banks, investors, customers and etc. In this assignment, it includes the accounting process, source document, double entry system and the users of accounting information.
1. Accounting process
Accounting process can be divided into four steps which is collecting, recording, summarizing of business transactions and business events in monetary terms such as evidences from source documents whereas the ultimate step is communicating the accounting information to external users (Andrew Leong ; Wong, 2th ed, 2006, p.2).
Accounting cycle can be divided into seven steps. Firstly, identifying business transactions from source documents such as invoice, cash bill, debit note, officials receipt and more. Secondly, recording business transactions into the 7 books of Prime Entry such as cash book, general journal, sales return and more.
Then, posting journal double entries system into the 3 ledgers which are general ledger, sales ledger and purchases ledger is the third step. Next, drafting trial balance and financial statement. The following step is the adjustment entries to record accrued, deferred, and estimated accounts. The sixth step is adjusted trial balance and financial statement. Lastly, closing entries for the current month (Betsy Li, Tan ; Goh, 5th ed, 2007, p.7). Refer to appendix 1.
Bookkeeping is a part of the accounting process and it is different from accounting. The process of bookkeeping is collecting and recording business transactions. All business transactions can be recorded in manual or computerised system. A manual bookkeeping system is recorded by paperwork and recorded according to the date based on the income that received in a business activities and expenses for the purpose of trading. For instance, most of the small business usually used manual accounting system. On the other hand, the computerised system records the business activities by electronic devices which runs by the accounting process. As such, these two types of bookkeeping have their pros and cons. Advantages of computerised bookkeeping are accuracy efficiency, automatic calculations and data storage safety in the system (Manual Bookkeeping, 2018).
2. Source Documents
In accounting process and bookkeeping, the source documents are very important and essential because source document provides evidence that can prove the business transaction and also financial transaction has occurred. As Peavler (2018) said, ‘If your personal taxes are audited, the source documents provide the proof that you’ve made those purchases.’ For example, when you start a business, you need to buy the inventories, office equipment, motor vehicles and so on. Besides that, you need to keep the original documents for every transaction. And also, when your customers purchase goods from you, return damaged goods to you or other transactions, you need to give them the original copy also keeping the duplicate copy for your own. The source document is very important because it proves all the transaction on how your business is operating and also as the evidence of your business transaction (Peavler, 2018).
After that, here are some of the examples of source document such as invoice, cash bill, payment voucher, official receipt, cheque counterfoil, credit note, credit note and more. First of all, invoice is a source document which record the goods are sold on credit or purchase on credit (Andrew Leong & Wong, 2th ed, 2006, p.90). It is also called a bill (Vidya Sethy, n.d). For example, when we sold goods on credit, we will record it into sales invoice, keep the duplicate copy and give the original copy to the customer which includes the payment terms, date of sale, items sold and selling price per unit, total amount, customer’s name and address and other information (Andrew Leong ; Wong, 2th ed, 2006, p.90). Refer to appendices 2.1.
Secondly, a source document prepared by the business which seller records the information of receiving the goods sold earlier and showing that the purchaser’s account has been credited the items and amount is called credit note (Vidya Sethy, n.d). A business document which list the information regarding a sales allowance or a sales return is also defined as credit note (Andrew Leong & Wong, 2th ed, 2006, p.91). Refer to appendices 2.2. Besides that, documents which note that the goods she/he purchased on credit earlier are to be returned to the supplier is called debit note (Andrew Leong & Wong, 2th ed, 2006, p.92). For instance, you purchased goods from your supplier and you found that there were some defective goods, therefore, you need to prepare a debit note to your supplier to inform them that the goods you purchased on credit earlier on are to be returned. Refer to appendices 2.3.
Besides that, cash bill, also a source document which likely same as invoice, but it only records the transaction which is on cash terms only. Moreover, cheque counterfoil is also a source document which occurred when a cheque is written; all the details will be recorded on the cheque counterfoil (Birt, Chalmers, Maloney, Brooks, Oliver, 5th ed, 2014). Refer to appendices 2.4. Also, there are some other key documents like delivery note. Delivery note is a source document prepared by the supplier when the goods have been delivered to the customer (Jacqueline et al., 2014). Refer to appendices 2.5. From this paragraph, it had introduced some of the examples of source document only. There are still many source documents we can find on the internet and from some other accounting books as well.
3. Double entry system
Double-entry bookkeeping was established in the Jewish community of the early-medieval Middle East (Parker, 1989). The globally used system of bookkeeping was developed in 1494 when Luca Pacioli, also known as the ‘Father of bookeeping’ was a partner of Leonardo de Vinci who wrote the first book on double-entry. It is widely believed that the system of double-entry bookkeeping was developed and formally set out by Florence, Genoa, Venice and Lübeck in the late 15th century (David Horner, 2015).
Double-entry system is made up by debit and credit. Debit (Dr) items represent the resources that are needed in undertaking the business activities. Assets, expenses and loses are classified as debit. However, credit (Cr) items represent the sources that provide or supply for the resources that are needed in undertaking the business activities. Liabilities, equity, revenue and profit are classified as credit (refer to Appendix 3.1). So, every transaction in double entry bookkeeping must involve at least 2 accounts. Double-entry is the accounting system of systematically recording two effects in every business transaction. As we know, every business transaction has two effects (dual effect) in the accounting system, therefore, debit entry and credit entry had caused by the dual effect. When dual effect occurs, the increases to the debit items recorded as debit entry; the decreases to the debit items recorded as credit entry. The increases to the credit item recorded as credit entry; the decreases to the credit items recorded as debit entry (refer to appendix 3.2). As a result, for every change on debit (credit) side, there is an exactly equal and opposite change on the credit side (debit). In short, debits amount is equal to credits amount; debit accounts equal to credit accounts (refer to Appendix 3.3). T-account (the account has a line separates the two sides and is the downstroke of the T) also rarely use in double-entry bookkeeping.
There are uncountable advantages for double-entry system. Firstly, the companies can maintain a complete record of every transaction classified as assets, liabilities, expenses, revenue, capital and recorded accordingly. Besides that, it allows the companies to prepare financial statements easily as it is a scientific system of recording business financial transactions in a set of accounting records. The trial balance in the double-entry bookkeeping system helps to uphold the accuracy of all books of accounts (Bookkeeping Beginner, 2017). On the other hand, double-entry bookkeeping system is complex and harder to understand for freshman as they always confuse with the special accounting meaning between debit and credit. Secondly, the overall cost of maintaining the double-entry system can be high, especially if companies have books of accounts maintained at different places and need to hire additional employees to keep track of books for each department. Costs will further rise as books of accounts become complex in nature. A lot of time is required to be spent on recording double-entry books of accounts, because every entry needs to be entered twice and cross-checked. Thus, this is the reason why it use up a lot of time.
4. Users of accounting information
According to Edwards and Hermanson (n.d.), accounting is a process that provides financial data for individuals to study the data vary widely. In fact, the main factors that provides the accounting information usually comes from the users’ needs as they require the accounting information to make their decisions (Kayode, 2015, p.3). As such, it categorized into two broad groups which are internal users and external users for a better financial decision.
Internal users also known as the primary users are the individuals who uses the information in a company to plan, organize and run a business (Weygandt, Kieso, Kimmel, 8th ed, 2008, p.6). For instance, a business owner or the shareholders need the aid of accounting information to analyse the financial stability, the growth rate and the profits they had earned in a business. Besides, management in a company such as managers helps to assess the performance of a business as well as planning, controlling and making a decision that ensures the company to earn profits. Accounting information uses as a guideline for marketing department to decide the price of the products that maximizes the company’s revenue. Employees also, to secure their jobs, they need to know more about a company’s operation in the aspects of employment rate, salaries, bonuses as well as the retirement benefits.
On the contrary, external users whom the secondary users are the one who uses the accounting information but does not directly involves in a business operation. External users such as creditors can be divided into suppliers and bankers. Suppliers by using the information can determine whether the entity have the ability to repay its debt from their purchases in a certain time period (Birt, Chalmers, Maloney, Brooks, Oliver, 5th ed, 2014, p.7) whereas the bankers are interested in whether an organization is able to repay the loans by providing the financial statements of the company. Furthermore, accounting information ease the investor by analysing the financial statements such as the company’s grand income, returns rate, future prospects and etc to decide whether or not to invest in a business.
A part from that, we, as the customers with the aid of data able to know about the quality, price, and the providable of the products by a business organization. Accounting information also is used by the government to evaluate a country’s economy and income, product’s price and so on. For instance, the meat of the price is always higher during festival seasons, hence, government is there for the price control to ensure the products were sold at the market price. Whereas under the government, there are taxation authorities who are in charge to collect tax and uses the data to analyse the amount of tax should be paid by the business company. Also, regulatory authorities in-charge in assessing a company whether it is abiding the rules and regulations set by the government such as the Corporations Act and Australian taxation law (Birt et al., 5th ed, 2014, p.7).
To conclude, accounting information is vital as it provides a picture of the financial position of a business organization (Heng, 2010, p.7). It helps in decision support for a company, interpreting the financial statements and so on. Without accounting information, a business organization may be a mess as everything clumps up together causing the company’s operation cannot function well.
Throughout this assignment, we have deeply learned about the uses and the purposes of accounting. Accounting is essential to business as well as individual in order to determine their financial statements. Most importantly, it is to measure whether a firm is making a profit or a loss. From another point of view, this assignment not only broaden our horizon in accounting knowledge, but also provides us a golden opportunity to cooperate with our teammates during discussion, lend a hand when others need help and be responsible on the task given. In time ahead, we will make full use of the knowledge we learnt in our daily activities.