TUTORIAL : Chapter 1 – Introduction to Accounting and Business

1.Differentiate sole proprietorship, partnership and limited company in terms of capital,
ownership and liability of members.

  1. Differentiate between accounting and bookkeeping.

4.Explain the importance of financial reports to the external and internal decision makers.

3.Explain briefly the four stages of accounting.

  1. State 2 types of journal and 2 types of ledgers.

Partnership

Limited Company

Sole Proprietorship

Capital

Ownership

Liability of members

Ownership

Capital

Liability of members

Capital

Ownership

Liability of members

OWNED BY ONE INDIVIDUAL(SMALL BUSINESSES)

OWNED BY TWO OR MORE INDIVIDUALS

OWNED BY SHAREHOLDERS OR STOCKHOLDERS/COMPANY DIRECTORS

THE SOLE PROPRIETOR IS THE ONE WHO BRINGS ALL THE CAPITAL REQUIRED TO RUN SUCH FORM OF BUSINESS WHICH INCLUDES HIS PERSONAL RESOURCES/BORROWINGS FROM FAMILY & FRIENDS,BANKS,AND OTHER FINANCIAL INSTITUTIONS

THE TOTAL OF CONTRIBUTIONS OF THE PARTNERS,HEREINAFTER SET FORTH,AS ADJUSTED TO REFLECT INCOME, GAINS,LOSSES,WITDRAWALS AND DISTRIBUTIONS

AMOUNT OF MONEY BY ITS OWNERS IN EXCHANGE FOR SAHRES OF OWNERSHIP

THE OWNER HAS UNLIMITED LIABILITY

USUALLY SPLIT AMONG THE PARTNERS/OWNERS BASED ON THE TERMS

LIMITED LIABILITY - ONLY TO THE AMOUNT UNPAID ON THEIR SHARES. ONCE THE SHARES FULLY PAID UP, THE MEMBERS HAVE NO FURTHER LIABILILTY FOR ANY OF THE OUTSTANDING DEBTS OF THE COMPANY

BOOKKEEPING

ACCOUNTING

PRODUCING INVOICES

MANAGING PAYROLL

POSTING DEBITS & CREDITS

MAINTAINING & BALANCING LEDGERS,ACCOUNTS,&SUBSIDIARIES

RECORDING FINANCIAL TRANSACTIONS

VERIFYING & ANALYZING DATA

GENERATING REPORTS,PERFORMING AUDITS,& PREPARING FINANCIAL REPORTING RECORDS LIKE TAX RETURNS, INCOME STATEMENTS, & BALANCE SHEETS

PROVIDING INFORMATION FOR FORECASTS, BUSINESS TRENDS & OPPORTUNITIES FOR GROWTH

HELPING THE BUSINESS OWNER UNDERSTAND THE IMPACT OF FINANCIAL DECISIONS

ADJUSTING ENTRIES

2 TYPES OF JOURNAL

2 TYPES OF LEDGERS

GENERAL JOURNAL

SPECIAL JOURNAL

WHICH IS IN A SMALL BUSINESS ENTITY RECORDS ALL THE DAY TO DAY BUSINESS TRANSACTIONS

IN THE CASE OF BIG BUSINESS HOUSES, TRANSACTIONS ARE RECORDED ON THE BASIS OF NATURE WHICH ALSO KNOWN AS SUBSIDIARY BOOKS USED FOR ENTERING INFREQUENT TRANSACTIONS SUCH AS OPENING ENTRIES, CLOSING ENTRIES, &RECTIFICATION ENTRIES

SALES LEDGERS

PURCHASE LEDGERS

GROUPS ALL ACCOUNTS RELATED TO CREDIT SALES & ACCOUNTS RECEIVABLE

ACCUMULATES ALL ACCOUNTS' PAYABLE BALANCES

INTERNAL

EXTERNAL

USED TO FORECAST SALES, EXPENSES, & PROFIT/LOSS FOR THE SHORT-TERM USUALLY ONE YEAR /LESS

MANAGERS ABLE TO UNDERSTAND PERFORMANCE OF THEIR ORGANIZATION TO EVALUATE THE EFFECTIVENESS OF BUSINESS UNIT/ PRODUCT LINE

USED BY COMPANY TO COMMUNICATE WITH ITS FINANCIAL RESULTS TO EXTERNAL PARTIES SUCH AS INVESTORS,LENDERS & SUPPLIERS

MAKE THE DECISION MAKING PROCESS TO RUN SMOOTH WITH THE ACCURATE FINANCIAL STATEMENT

RECORD TRANSACTIONS

ADD JOURNAL ENTRIES TO GENERAL LEDGER

ANALYZE TRANSACTIONS

RUN AN UNADJUSTED TRIAL BALANCE REPORT

The first step of the accounting cycle is to analyze transactions. Transactions may consist of receipts and invoices. Receipts, of course, denote an expense, whereas invoices denote revenue generated. To begin with the accounting cycle, you must identify all of your business’s transactions for the given financial period.

After analyzing your business’s transactions, you’ll need to record them in the form of journal entries. Journal entries are a form of structured data about transactions. They typically include the date of a transaction, the dollar amount of a transaction, the account number associated with the transaction and a brief description. If you use Quickbooks, you can create journal entries for your business’s transactions using the accounting software

The third step of the accounting cycle is to add the newly created journal entries to your business’s general ledger. The general ledger is a document that contains journal entries for transactions. Also known as the nominal ledger, it serves as the central hub for accounting processes. You can review your business’s general ledger to gain a better understanding of its financial health. Once you’ve identified your business’s transactions and recorded them in the form of journal entries, you should add those journal entries to your business’s general ledger.

The fourth and final step of the accounting cycle is to run an unadjusted trial balance report. It’s a summary of all the balances in your business’s general ledger. With an unadjusted trial balance report, you’ll see an overview of your business’s transactions displayed neatly in a single report.