Accounting as Language of Business - Essay Example

Contents ACCOUNTING INTRODUCTION BOOK KEEPING OBJECTIVES OF ACCOUNTING INFORMATION SYSTEM NEED OF BUSINESS RECORDS WHAT IS TRANSACTION INTERNAL TRANSACTION EXTERNAL TRANSACTION AFFECTS OF TRANSACTION ON THE "ACCOUNTING EQUATION" Transaction # 01 OBJECTIVES OF MANAGERIAL ACCOUNTING COMPUTERIZED BASED ACCOUNTING INFORMATION SYSTEM Peachtree Introduction PEACHTREE EXERCISE Bringing up Peachtree Setting up a new company Company Information Page Chart of Accounts Journal Entries Financial Reports MY REVIEW References: ACCOUNTING INTRODUCTION Accounting is the "Language of Business". The manager cashier ands salesmen use the term accounting to explain the events of the existence of business. It is found that many of the terms used in accounting have absolutely different meanings in non-accounting usage. If it is decided to get knowledge of accounting, we will have to increase our understanding of the business operations and the ways in which business decisions are made. The professional accounting must be expert in the use of this "Language". Every language changes gradually to meet the changing needs of the society. In the same manner, changes and improvement in accounting too, are continually being made, in the process of business information. BOOK KEEPING Definition: "Book-Keeping is the art of recording business dealings in a set of books" J.R. Batliboi. "A systematic record of the daily (and hourly) events of a business leading to the presentation of a complete financial picture is known as accounting, in its elementary stage, as BOOK KEEPING." ----- M.C. Shukla. "Book-Keeping is the science of recording transactions in money or money's worth in such a manner that at any subsequent date, the nature and effect of each transaction, and the combined effect of all the transactions may be clearly understood, so that the accounts prepared at any time from the records thus kept, may show the owner of the books his true financial position"----- L.C. Cropper. OBJECTIVES OF ACCOUNTING INFORMATION SYSTEM The main objects of accounting information system are as under: 1. To maintain proper records of day to day business transactions instead of relying on simple memory and thus to avoid dispute with customers or suppliers and employees. 2. To keep an eye on each and every tangible and intangible asset. 3. To ascertain the working results from the written records of transactions, i.e., whether profit or loss has incurred after a prescribed reasonable period. 4. To ascertain the financial position of the business on the last date or at the end of a period in terms of assets and liabilities. 5. The help and guide the management of the business enterprises to make decisions from the historical data of accounting of the past. 6. To help and guide the management of the business to determine their policies for the current period and for future, in short and long terms. NEED OF BUSINESS RECORDS Those who invest their capital and devote their efforts in business expect that they will receive a return in the form of profit. Moreover, they employ managers in the business it is the duty of the managers to maximize profit and to minimize losses. In order to maximize profits and to minimize losses there must be proper record of all events and transactions of the business so that at the end of a period, the owner of the business can have knowledge about:- 1. The gross profits on purchases and sales of merchandise. 2. The net profit or loss after checking of all paid or accrued expenses, usage of different assets. 3. The cost of assets in detail and total of all assets. 4. The liability of business including accrued. 5. The amount of investment at the end of the period. In a nut-shell the owner can see the report of his business after a certain period at a glance and can judge progress of his business. WHAT IS TRANSACTION Any exchange of values is called "transaction" such as a) Purchase of Merchandise, Land, Building, and Furniture on cash. b) Purchase of Merchandise, Plant, Furniture etc. on credit. c) Sold Merchandise, Old Furniture, Building, Equopment on cash. d) Sold Merchandise, Old Equipment, land, etc. on credit. e) Rendered services on cash. f) Rendered services on credit. g) Received cash / cheque / note / bill. h) Paid cash / cheque / note / bill. All the above exchange involved the values. These transactions are sub-divided into:- Cash Transaction Credit Transaction There are two types of transactions used in every business. Internal Transaction External Transaction INTERNAL TRANSACTION Internal transactions are those transactions by which internal events of the business are affected. EXTERNAL TRANSACTION External Transactions are those transactions by which the external parties are affected in the business assets. AFFECTS OF TRANSACTION ON THE "ACCOUNTING EQUATION" Each and every transaction affects the basic of accounting equation. Each transaction will bring a change in the value of assets, liabilities and proprietorship of the business in the shape of INCREASE (+) or DECREASE (-) as it is shown below: Transaction # 01 1. Mr. Lee started his business with cash US $ 90,000/- Assets = Liabilities + Proprietorship Cash = Capital, Mr. Lee +90,000 = +90,000 2. Purchase Building on a cash of US $ 40,000/-. Assets = Liabilities + Proprietorship Building + Cash = Capital, Mr. Lee + 90,000 = + 40,000 - 40,000 = +90,000 Balance 40,000 + 50,000 = 90,000 OBJECTIVES OF MANAGERIAL ACCOUNTING The National Association of Accountants (now Institute of Management Accountants) defines managerial accounting as "the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by management to plan, evaluate and control within an organization and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities."4 Figure 1-1 illustrates the objectives, activities, and processes of managerial accounting. NAA Statement Number 113, June 19, 1983, "Objectives of Management Accounting." COMPUTERIZED BASED ACCOUNTING INFORMATION SYSTEM Since 1976 there have been several software programes in AIS enetering and performing as best as they can be. Companies choose in among as per the feasilbility like as Peachtree, Quikbook, Foxpro and so on. As a practical example, Peachtree has been chosen to be described and how does this software work and record and maintain data for present and future concerns. Peachtree Introduction Peachtree Accounting is business management software published by Sage Software and sold primarily in the United States. There have been several generations of software sold under the Peachtree Accounting name. Peachtree Accounting was originally sold by Peachtree Software, a software publisher founded in 1975 by Jim Dunion with the first software published in 1976. Peachtree is a popular accounting software program used by many different kinds of organizations. It allows the user to quickly and easily create a chart of accounts for a new company. Once the chart of accounts is created, journal entries can be entered and financial statements can be quickly and easily prepared. In this short exercise the student will create a chart of accounts for a new company and save the files to disk for later use in journalizing transactions and preparing financial statements. PEACHTREE EXERCISE Bringing up Peachtree Click on the Windows Start Button. Select Programs. Select Accounting Applications Select Peachtree Complete Accounting Educational Version Select Peachtree Complete Accounting Close Peachtree Online Update window Setting up a new company Select Set Up a New Company Go through the New Company Setup - Introduction Wizard Company Information Page In company name cell, select a name which contains your last name. Write down your company name as you will have to retrieve this precise file. Use 3620 College Way North, Seattle, WA 98103 as address. Use 316-567-380 for telephone number Use Federal ID # of 21-1234567. Leave other tax ID cells blank. Select corporation as the form of business type. Select Next Chart of Accounts Select default Set up a new company based on one of several sample companies (2nd option on the list) From sample list, select Accounting Company Select the default Accrual Accounting Select the default Real Time For Accounting Periods select the default 12 monthly accounting periods Select default Year 2006 and current month for accounting periods and fiscal year. Accept the defaults relating to terms and inventory costing At Congratulations window, select No I do not need the Setup Checklist Select Finish Journal Entries From Tasks Drop Down Menu, select General Journal Entry As you enter journal entries , click on spy glass in Account Number Cell and enter the appropriate account number. After each journal entry click Save. For now, leave the description cells blank. As the owner, you invest $50,000 in the business bank account. Debit Regular Checking Account and Credit Common Stock Now use Peachtree to record the following transactions. Enter debits and credits. Remember to click Save after you enter the Dr and Cr for each transaction. Wrote a check and purchased a computer for $2,500. (Dr. Equipment) Paid rent expense of $1,300 for one month's rent. ( All payments are from ckg. acct.) Purchased office supplies on credit for $300. (Dr. Supplies Expense) Recorded $5,700 for work done on account. (Cr. Accounting Fees) Paid temporary employee $1,800. (Dr. Salaries Expense.) Received $5,700 from customer for work done on account Paid $200 on accounts payable relating to supplies purchased on credit Close General Journal Window. Financial Reports From Reports Drop Down Menu, select General Ledger. Select General Journal from Report List (double click to pull up journal). Select Options Icon, select Fields, Delete on Transaction Description Select Show on GL Account Description. Click OK. Select Print. Total Dr and Cr should equal $67,500.00. From Reports Drop Down Menu, select Financial Statements then select Standard Income Statement. Select Options Icon and remove check mark opposite Show Zero Amounts. Click OK. Now select Print. Then select Retained Earnings and Balance Sheet. Select Print. Close Financial Reports Window Submit your printouts. Be sure your printouts show your company name. MY REVIEW Today is an era of interesting changes and challenges. Information technology is defining our approaches of life and ways of thinking. It is opening endless opportunities to expand our logical, academic and certified visions. It is no wonder that today we study accounting information systems not only emphasizing the mechanics and functions of accounting but also incorporating the opportunities in innovative applications of IT. AIS have indeed become information systems for decision making and control because of increasing applications of information technology. Peachtree is a service function. It provides financial information to people inside and outside the organization. Organizations provide information to people within the organization who need information for management decision making. People external to organization also need accounting information. These informations are provided as regulatory requirements like filing to the SEC (US Securities and Exchange commission) or for business decisions relevant to the organization, like external financing for the organization. Users like financial analysts, investors, researchers rely on the publicly available information e.g., annual reports. A well developed accounting system meets the needs of all these different kinds of users. References: www.peachtree.com NAA Statement Number 113, June 19, 1983, "Objectives of Management Accounting." Authors Definition taken by Intermediate Accounting 1979. L.C. Cropper , M.C. Shukla, J.R. Batliboi. Read More