2.9. Accounting cycle
In a well designed accounting system, all accounting processes
are undertaken in a form of a cycle, known as the accounting
cycle.
An accounting cycle is a complete sequence of accounting
procedures within an accounting system of an enterprise that are repeated in
the same order during each accounting period from the start to the end of such
period.
It outlines the various accounting processes that are undertaken
by the accountant so as to process transactions data through the books of
accounts such as journals,
cash books, and ledgers, to summarize and draw up financial
statements and reports on the enterprise's performance continuously and at year
ends. An accounting cycle for a typical business organization consists of the
following key procedures;
· Record daily transaction data in source documents. This
is a piece of paper or
· document that initiates a transaction and reports its
occurrence, e.g. an invoice,
· cash receipt, debit and credit notes, etc.
· Analyze and record day by day and in chronological order
the daily source document transactions in the journal.
· Classify and post the journal transactions data to the
ledger.
· Balance, foot and rule the ledger accounts to ascertain
the balances in such accounts.
· Prepare a trial balance to summarize and list balances
in the ledger accounts to test their arithmetical accuracy, the accuracy of
postings and to prepare financial data from which to prepare financial
statements.
· Prepare a worksheet as a tool used to sort out, update
and organize trial balance information needed at the end of the period to
summarize and report on the performance of the entry in the form of financial
statements, namely the profit and loss accounts and the balance sheet.
· Correct, adjust and update the trial balance
information in the worksheet to ensure that all the transactions data and other
accounting information that ought to be recorded in the accounts in the ledger
have in fact been recorded and that errors committed in processing accounting
information in the source documents, the journal, the cashbook, the ledger and
the trial balance are corrected.
· Prepare financial statements in the form of:
· The profit and loss accounts or income statements to
show the net profit earned or the net loss sustained for the year, and the
balance sheet to present the financial state of the business as at the close of
the accounting period.
· Close books of accounts and reverse the entries to
complete the records of the accounting period before the transactions of the
next accounting period are entered in the books of accounts.7
2.10. Importance of general accepted accounting
principles
· They attempt to produce standardization in collecting,
recording, classifying, summarizing and reporting of accounting information.
· They attempt to issue general consensus among
authoritative groups concerned with accounting information as to the treatment
of various items such as assets, liabilities, capital, revenue (income) and
expenditure.
7 S.N Maheshwari, an introduction to accountancy,
fourth edition, 1996
· They define objectively and after careful research the
items used in the language of business such as double entry, depreciation, book
keeping, accrual, etc.
· They establish a fairly common accounting framework
for processing and reporting financial data and describe the whole range of
business transactions in a meaningful manner
· They clarify and improve financial reporting to
outsiders especially on the issues of diverse opinion within the accounting
profession such as valuation of stock, depreciation of fixed assets, etc.
· They offer a well defined and researched body of
accounting principles to guide managers in preparing financial statements.
· They generally creates confidence in the reliability of
financial statements8
2.11. The system of bookkeeping
2.11.1.
Double entry bookkeeping
Double entry bookkeeping is the most efficient and effective
method for recording financial transactions in a way which allows the easy
preparation of financial statements. In double entry bookkeeping system, every
transaction is recorded twice.
This reflects the dual nature of transactions and provides an
arithmetical check. In order to understand the principle of double entry
bookkeeping, you need to remember that the business is a separate entity from
its owner when carries out its activities. Therefore it can enter into
transactions with the owner.
All businesses need resources and these are known as assets.
Example include, cash, stock, office furniture and equipment, vehicles, plant
and machinery and premises. But before the business can acquire any assets, it
must have funds. In a new business the most likely source of funding is the
owner. The amount invested by the owner is known as capital. Capital is the
liability of the business because the business owes money to the owner. If no
one else has funded the business the assets of the business are equal to the
capital and this can be shown in form of equation; Assets =
Capital.
8 Accounting principles board(APB) statements
No.4, basic concepts and accounting principles underlying financial statements
of business enterprises, American institute of certified public accountants,
1870, p.40 5 Ibid, p. 76-84
However the business may have also received funding from the
bank or other lenders in the form of a loan in which case the equation becomes;
Assets = Capital + other liabilities. This is known as the
accounting equation and it is important to note that the equation must always
balance.
Advantages of double entry bookkeeping
· It presents a complete picture of the initiation and
occurrence of each and every transaction.
· It gives operational support for the accounting
equation framework that is the total economic resources of the business (its
assets) must always be equal to the sources of funds (liabilities and capital)
which were used to acquire the resources.
· It makes it easy to logically follow the movement of
funds in the course of trading
· It gives a double check on each transaction recorded in
the accounts as equal debit and credit entries are made for every
transaction.
· It facilitates the mathematical check of the accuracy of
bookkeeping, as at anytime, debits should equal credits.
· It provides a reliable way for the basic requirements
expected from accounting records, which can be verified by outsiders.
· It permits the orderly classification and summarization
of transactions and the preparation of financial statements from them.
2.11.2. Single entry system
An incomplete double entry system can be termed as a single
entry system. According top Kotler, it is a system of bookkeeping in which as a
rule only records of cash and personal accounts are maintained. This system has
been developed by some business houses who for their convenience keep only some
essential records. Since all records are not kept, the system is not reliable
and can be used only by small business firms.9
9 Anthony, R.N. and J.S , Management accounting
principles, Taraporewala,1975,p.11
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