Unit (38) - All business, whatever their size and nature, must keep records and accounts of their financial transactions. - A sole trader might use these records to declare income for tax purposes. - Larger companies need to provide financial information for their shareholders and for internal use. - The information may be useful to people both within and outside the company. Recording business transaction

( 4 ) Employees, these might need records and financial information to provide them an image about wage bargaining profitability and liquidity. ( 5 ) The owners they will assess the company performance by suing the financial records. A sole trader might look at the annual profit and decide whether or neat they could earn more from another activity.

Who uses the records? External needs : - Where are legal needs should be satisfied. - The accounts of limited companies have to be checked every year by independent auditors. - Companies must send a copy of their final accounts to the registrar of companies. - All businesses must declare their annual income to the inland revenue at the end of a trading year. - Some groups might be interested in the performance and stability of the business as follows.

( 1 ) Bankers, If a company is trying to obtain a loan or has received a loan, bank managers will a insist on access to records. There records allow them to assess the ability of the company to repay the loan. ( 2 ) Suppliers, If a business needs to get large quantities of materials on credit, the suppliers have to assess the credit worthiness of the company. ( 3 ) Competitors, financial information can be used to make a comparison with other competitors.

( 4 ) Local community. The local community might be interested in the stability of a company, to assess employment prospects. ( 5 ) Media, all means of media are interested in financial records, because they use it when reporting. ( 6 ) Future investors, financial institutions and private sector need to be war when deciding to invest their funds.

Who produces the accounts? - Accountants are responsible for supplying and using financial information. - Accountancy specialists sell their services to small and medium firms. - They use transactions to produce final accounts. - They may advise clients on various financial matters. - Another functions for accountants is auditing. - Businesses which produce their own final accounts, must be checked by independent firm of accountants.

The difference between financial and management accounting : - Financial accountants responsible for make sure that a companies accounts are true and fair. - They manage the book-keeping process. - The financial accounting involves recording every single business transaction. - And they summaries these records and convert them into statements. - Financial accountants are concerned with the past.

- Management accountants are concerned with the future. - They need knowledge of accounting concepts and methods. - They also require training in economics and management. - They are involved in decision making and problems solving. - They are responsible for producing cost and financial data interpreting financial statements and preparing forecasts an budgets. - They act as information servants to the management team, and help in planning and control.

How are accounts constructed? - The accounting process must produce accurate business statements. - The business statement reflect "a true and fair view of a company's financial position. - A series of accounting conventions and concepts should be followed. - The interpretation of business statements relies on the judgment of accountants. - It is possible for different individuals to draw different conclusions from the same information.

What are the main concepts used in accounting calculations? ( 1 ) Going concern : Accountants assume that the business will continue for an indefinite period of time. Assets are valued as if they will continue in their present use rather than at net realizable value. Assets are valued at the cost when they are bought "Historical cost". ( 2 ) Accruals or matching : The costs and revenue should be matched with the period in which they occur. According to this, principle the cost should be included even though the bill is unpaid. Related to this is the realization concept, this states that profit occurs when goods and services change hands and not when payment is made.

( 3 ) Consistency : Once a decision has been made a bout the allocation of costs or the valuation of assests, it should not be changed. This will make comparisons more meaning full and reduced the chance of figure being destroyed. ( 4 ) Prudence and caution : If an asset is bought at a bargain price rather than the recommended price, the lower value is a laws recorded. Accountants undervalue future revenue or profit until its realized. They make provision for costs or losses immediately they occur even if they are only forecast.

( 5 ) Separate entity : A business is a legal person in it's own right and has a separate identity from that of the owners. ( 6 ) Double entry : Double entry is a system of recording transactions. It uses the fact that there are always two sides to transactions. ( 7 ) Money terms : All transactions should be recorded in money terms. Money is a unit of account. It allows the values of goods and services to be expressed accurately and make comparisons easier.

( 8 ) Historical costs : - All assests should be valued according to it's original cost rather than what they are currently worth. - Accountants prefer to deal with values which have in the past been confirmed with evidence. - They do not like to rely on estimates. Recording business transactions in practice : - Book-keepers are responsible for recording transactions. - Many sole traders keep own records because they can not able to employ book-keepers. - In large businesses, book-keepers will work under the supervision of accountants. - When a transaction takes place, it should be verified by a document. - From these documents, entries are made in the companies books. - The first entries occur in the subsidiary books.

- The day books will contain records of all purchases and sales. - Cash book lists the flows of money into and out of the business. - At the end of the month, entries in these books will e totaled and recorded in ledgers. - A ledger contains details of individual business accounts. - The sales ledger records transactions with customers and the purchase ledger records transactions with suppliers. - The accounts of customers and suppliers are called personal accounts. - All others are impersonal and are recorded in the nominal ledger.

- The heading of the nominal ledger might include, the wages account, the purchase account, and the sales account. - From time to time a company way wish to check that all previous entries are correct. This can be done by producing a trial balance. - In recent years a variety of software is available to help, book-keeping, accounting, stock control and financial control.

Double entry : - During the trading year, this could involve hundreds, thousands, or even millions of entries being made in records. - The system used to day is called the Italian method that development by luca paciolim in the fifteenth century. - The term double entry comes from the principle that every transaction has two parts. In order to explain how the system works it is necessary to define two terms, debit and credit. - A debit involves an entry on the left-hand side of an account indicating a receipt of value. - A credit is entered on the right hand side indicating that value has been given out. - Debits increase assets and decrease capital and liabilities. - Credits decrease assets and increase capital and liabilities. - You will notice that the debit and credit side of the accounts are both equal.

An introduction to business statements : ( 1 ) Balance sheet : Provides information a bout the companies funds and how they are used. It contains, the asset, liabilities of a business at a particular point in time. ( 2 ) Profit and loss account : Provides a summary of the years trading activities. Stating the revenues from sales, costs, profit/loss and how the profit is used.

( 3 ) Cash flow statement : - Shows the flows of cash into and out of a business in a trading year. ( 4 ) Notes to the accounts : - Notes to the accounts are a more detailed analysis of some entries in the above statements. ( 5 ) Directors report : This statement, written by the directors is required b low. It contains information which might not be shown in other financial statements such as a number of employees, ect.

( 6 ) Chairperson's statement : The mair role of chairpersons is to communicate with the shareholders. They can do so by making a statement in the annual report. The chairperson discusses the company's general performance. ( 7 ) Auditor's report : - Auditors must make a brief report to confirm that the accounts give a true and fair view of the firms financial position. ( 8 ) Statistics : Tables and graph can be used to illustrate trends and comparisons. They might show turnover, profit, and dividends.