Bookkeeping & Accounting - Essentials to a New Business

Upon starting a new business your enthusiasm sometimes overwhelms you. That is justifiable because you are starting a new venture. If you are new to a business venture, then you should know a few things about accounting. Most people think bookkeeping and accounting are one in the same, when, in fact, they are not. They are related but not the same.

Bookkeeping

Bookkeeping is a record of your daily, weekly, and monthly activities. It tracks what you spent and how much you received for your goods or services. These records reflect a snap shout of your business. They help you keep track of your profits and losses.

Keeping up with all your expenses, purchases, and sales is essential to figuring your cost of goods sold and in helping you in figure your taxes later on. The better you keep your records, the more you will know about your business.

Each day, week, and month will be an individual picture showing you how you are progressing or not progressing.

Accounting

Accounting is the process of taking the information you kept in your bookkeeping process and making a moving picture out of it. This movie will actually show you what you have done, where you are heading, and what you should expect. Simply put accounting is putting all the pictures together in a logical order.

Once you have done this, you can figure out your tax liabilities, tax advantages and other governmental requirements. If you are not current with tax laws and regulations, your bookkeeping will be essential to an accountant.

An accountant will help keep you on the right track. It is generally best to consult with a certified public accountant (CPA) to get you on the right path. As the old saying goes, "an ounce of prevention is worth a pound of cure." The one thing you don't want is trouble with the Internal Revenue Service.

Accounting + Book Keeping = Financial Picture

The two parts of handling finance is essential in keeping your business going. Bookkeeping and accounting go hand and hand and will make or break your business you worked so hard to get going.

* Bookkeeping is the records keeping process,
* Accounting is the interpretation of the records you kept.

Used wisely they will be essential to taking advantage of all the tax breaks you are entitled to receive.

A parting thought. The more organized you keep your books and the more accurate they are, the more money you save when it comes to going to an accountant at tax time.

Bookkeeping & Accounting - Essentials to a New Business
By Robert Joe Wallace

An Overview of Accountancy

What is accountancy? Accountancy is a specialist role designed to communicate financial information to the upper echelons of a particular business and generally follows specific guidelines, dependent on country, by generating monthly, quarterly and annual reports depicting the status of a company's assets and financial health.

The skill set associated with an accountant's role is apparent in the way the accountant presents the information gleaned from a financial audit and presents the findings in such a way that the relevant information can be accessed quickly by the reader, analysed, and applied to the reader's area of business effectively.

It is also a branch of mathematical science and is considered useful in determining the success or the failure of a business. The three main areas of accountancy as a whole can be broken down to bookkeeping, auditing and named accounting.

Essentially accounting is defined by the way in which financial information is recorded, classified and then interpreted and what the subsequent effects are thereof and the implications that can be ascertained from the data collated.

The information that is useful to a particular person or body must be presented in a way in which it can be accessed easily and will have sections that hold more weight for typically; creditors, banks, government bodies, financial analysts and economists.

Early accountancy records date back from many thousands of years with the earliest records being found some seven thousand years ago in the Middle East. The records show that these people used primitive accounting methods to analyse their crop cycles and the advancement or growth of their herds.

Obviously these methods have evolved greatly over the many years that have passed and complex solutions have been developed to deal with the huge changes in society and the subsequent global growth of business.

The majority of accountancy roles available today involve significant usage of computer aids and programs whereby complicated mathematics can be performed exceptionally easily and the margin for error can be lowered to some degree. There are many types of computer systems available to help with accounting and they vary from personal accounting, small business to larger companies and so on.

An Overview of Accountancy By Christopher Rymer

The accounting conceptual framework

This article begins by outlining the nature and purpose of a conceptual framework, explains the purpose and scope of the Statement of Principles and defines the fundamental accounting concepts.

Nature and purpose of a conceptual framework

An accounting conceptual framework can be defined as:

“a coherent system of inter-related objectives and fundamentals that should lead to consistent standards that prescribe the nature, function and limits of financial accounting and financial statements.”(AT Foulks Lynch)

However, it is easier to state what a conceptual framework should be, than to actually precisely define it. There have been several attempts made to devise such a framework, most recently (March 1999) the revised Exposure Draft — Statement of Principles for Financial Reporting, which is examined later in this article.

The main reasons for developing an agreed conceptual framework are that it provides:

* a framework for setting accounting standards;
* a basis for resolving accounting disputes;
* fundamental principles which then do not have to be repeated in accounting standards.

However, the main draw-back of a conceptual framework is that it can be too general in nature and the principles may, therefore, not help when actually producing the financial statements. In addition, there may be further disagreement as to the content of the framework and the contents of standards.

Purpose and scope of the Statement of Principles

The purpose of the draft Statement of Principles is to define the principles that should underlie the preparation and presentation of general purpose financial statements. It also provides the conceptual underpinnings for preparing future accounting standards. The Statement comprises the following eight chapters:

1 The Objective of Financial Statements.
2 The Reporting Entity.
3 The Qualitative Characteristics of Financial Information.
4 The Elements of Financial Statements.
5 Recognition in Financial Statements.
6 Measurement in Financial Statements.
7 Presentation of Financial Information.
8 Accounting for Interests in Other Entities.

The ASB believe that the draft Statement will assist preparers and users of financial statements, as well as auditors and others, to understand better its approach to formulating accounting standards. It should also help them to understand better the general nature and function of information reported in financial statements.

It is important to remember that the Statement of Principles is not an accounting standard and, therefore, does not prescribe how financial statements should be prepared or presented.

The draft Statement focuses on the financial statements that are either intended to give a true and fair view of the organisation’s financial performance and financial position or are intended to be consistent with financial statements that give such a view. This includes annual and interim financial statements, as well as preliminary announcements and summary financial statements.

Relevance of the Statement

The draft Statement is primarily designed to be relevant to the financial statements of profit-oriented organisations including those in the public sector, regardless of their size. However, it could also be relevant to not-for-profit organisations if some of the principles are re-expressed or their emphasis changed. A separate paper on not-for-profit entities and the Statement of Principles is to be issued in due course.

The draft Statement recognises that the concept of a true and fair view is fundamental to the whole system of financial reporting. An example of this is its insistence on relevance and reliability as the main indicators of the quality of financial information. The concept of a true and fair view is considered to be the ‘ultimate’ and lies at the core of all financial reporting. It is regarded as the ultimate test for financial statements and, as such, has a direct effect on accounting practice.

Financial statements will not give a true and fair view unless the information they contain is sufficient in quantity and quality to satisfy the reasonable expectations of the readers to whom they are addressed. These expectations change over time and the ASB seeks, through its accounting standards and other pronouncements, to respond to these expectations.

The objectives of financial statements

The Statement of Principles defines the objective of financial statements as:

“to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions.”

This definition provides the basis for developing all the subsequent principles within the Statement. Fundamentally, the Statement assumes that it can achieve this objective by focusing on the information needs of present and potential investors. This is because they need information about the organisations financial performance and financial position that is useful to them in evaluating its ability to generate cash, and in assessing its financial adaptability.

Fundamental to the preparation of financial statements is the need to provide relevant, reliable, comparable and understandable information. In deciding which information to include in financial statements and how to present it, the aim should be to ensure that they provide information that is useful. The materiality test is used to determine whether the information’s usefulness is of such significance as to require it to be given in the financial statements. An item of information is considered material to the financial statements if its misstatement or omission might reasonably be expected to influence the economic decisions of the users of those financial statements.

Fundamental accounting concepts

Academic writers on accountancy, and others, have identified many accounting concepts which could be regarded as forming part of the accounting conceptual framework. However, the fundamental accounting concepts are defined in SSAP 2 and are often referred to in later SSAPs. The four concepts are defined in the standard as follows:

Going concern: “the enterprise will continue in operational existence for the foreseeable future. This means in particular that the profit and loss account and balance sheet assume no intention or necessity to liquidate or curtain significantly the scale of operation”.

Accruals: “ revenues and costs are accrued (that is recognised as they are earned or incurred, not as the money is received or paid), matched with one another so far as their relationship can be established or justifiably assumed”.

Consistency: “there is consistency of accounting treatment of like items within each accounting period and from one period to the next”.

Prudence: “revenue and profits are not anticipated, but are recognised by inclusion in the profit and loss account only when realised in the form either of cash or of other assets the ultimate cash realisation of which can be assessed with reasonable certainty; provisions made for all known liabilities (expenses and losses) whether the amount of these is known with certainty or is a best estimate in the light of the information available”.

SSAP 2 acknowledges that the relative importance of these concepts will vary according to the circumstances of a particular case; however, it is made clear that where the accruals concept is inconsistent with the prudence concept then prudence should take precedence. At level C candidates need to be able to define the concepts and apply them when preparing financial statements.

Conclusion

This article has outlined the nature and purpose of a conceptual framework and explained the purpose and scope of the Statement of Principles. Candidates often overlook this important area of the syllabus which is fundamental to understanding the whole process of preparing financial statements.

Further reading

Accounting Standards Board, (1999), Revised Exposure Draft — Statement of Principles for Financial Reporting, ASB Publications.

AT Foulks Lynch (1998), Drafting Financial Statements (Industry & Commerce), AT Foulks Lynch Ltd, Chapter 2.

Black, G. (1998), Students’ Guide to Accounting and Financial Reporting Standards, Letts, Chapter 2.

BPP, (1998), CAT Interactive Text — Drafting Financial Statements, BPP Publishing Ltd, London, Chapter 3

Wood F., and Sangster A., (1999), Business Accounting 1, Financial Times Professional Ltd, Chapter 10.

source:ACCA