Accounting

Introduction

Businesses buy and sell items and services. It is necessary to keep a track of both the flow of goods and the flow of money in order to be able to account for the resources involved.

In times gone by the authorities might have taxed farmers by way of 20% of the goods produced. Modern governments have devised a number of ways of taxing people and businesses.

The following are common forms of taxation Thus taxes are commonly imposed on With the Government imposing these and other taxes businesses must be able to price goods in such a manner that they can operate profitably.

In summary Accounting monitors the flow of Goods generally come from two main sources Legal Matters

The operation of a modern society is governed by laws. Governments often invent new laws and tinker with others.

The Laws of particular relevance to business operations include the following Laws are generally designed to make the operation fair and just.

The Role of the Accountant

Accountants need to become knowledgeable in all areas of business law as they are generally called upon by their clients to give them business advice to it is necessary for them to have a clear understanding of  what the law allows and what the law does not allow so that give correct guidance.

Accountants generally come at two or three levels Sources of Information

Whenever goods are received documentation will generally accompany them detailing quantities and values - Invoices.
Generally on a monthly basis firms extending credit to customers will send statements showing goods purchased, payments made and the balance owing - Statments.

Businesses are best advised to bank all money received and to pay for all services and purchase by chequeas this yields a very good easy-to-follow paper-trail of income and expenditure prepared by a 3rd party - The Bank.

Inevitably smaller businesses pay for some items with cash from the till. They should have a proper petty cash system in place where a slip showing the amount withdrawn from the till is placed in the till. At the end of the day the cash plus the value recorded on the slips plus the value of items charged to accounts should come to the same total for the day as the value of the sales plus money received for the reduction of account balances of customers.  In fact it's a good idea to keep money from new sales and that paying for past sales separate prior to banking. (Record them separately when banking.)
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Thus - in relation to sales we are seeing 3 sources of information In relation to the following
there should be Record keeping

The number one rule is - keep all documentation for at least 6 years - after that no-one can sue you although the tax department can dig back deeper into the past.

There are 2 main methods of record keeping The final answers need to be the same but the format of the record-keeping can be quite different as computers can handle and manipulate data in a manner which is different to the way in which one may do so manually.

There is a good principle of accounting which expressed simply says - calculate the same thing in 2 different ways and check that you get the same answer !

For example - if one has a table of numbers adding across rows and totalling the row totals should give the same result as adding down columns and totalling column totals.

Here is another example - totalling the cheques issued should give the same answer as totalling the same ones when they are recorded on a bank statement where they will be recorded in a different order.


Use of Computer Record-keeping systems

Because 'rubbish in' leads to 'rubbish out' the results emanating from computers can easily be incorrect. Thus it is necessary to coordinate data from such systems with reality - that is with records of the movement of goods, services and money and to ensure that they agree at the places they should agree.

A common approach of many accounting packages is to record things as they happen In one sense - this method is a bit theoretical - it tells one what the money situation should be once all transactions are completed - and this is very valuable information. But - when errors are made they may not be at all obvious leading to false impressions as to the true situation.  Despite that, this is a very important tool for some businesses and needs to be used. Errors can be detected by reconciliation of the estimates produced with the Bank account and other records.

A second approach is to process all transactions passing through the Bank Accounts of the business.  This data has been processed by a 3rd party - The Bank and so can be relied upon. It is a factual record of what has happened - as distinct from a record of what is meant to happen or meant to have happened.

Scooping Data for Multiple Purposes

Governments typically want
The Income tax payable and the part of the VAT needing to be sent directly to Government directly, necessitate the classification of all transactions in the following ways These items may also have to be sub-classified as to whether they contain VAT or not.

A systematic approach is to classify all transactions each month to obtain required monthly data which will put one in the position of having data building up month by month ready for the annual accounting analysis.  This is much better than selectively processing part of the information each month to satisfy VAT and any other monthly requirements such as social security payments.

This type of analysis can be done from the Bank account data and petty cash transaction information.

Summary

The accountancy course which this relates to covers all of the items mentioned here and a few others as follows

David L Evans Ph D

Director
Business Mathematics Consultants