Principles of Accounts

The Accounting Cycle

The accounting cycle involves six steps

1. First a transaction occurs:
   • A transaction is a financial event for example the purchase of goods for resale, injection of capital into the business, the sale of goods on credit or for cash etc
   • The transaction is analysed and the accounts involved are determined as well as the amounts involved
2. The transaction is then recorded on source documents/founding documents these could be in the form of receipts, invoices, credit note, debit note, contract of sale etc
3. Then the transaction is recorded in the appropriate book(s) of original entry/subsidiary books these include the Sales Day Book, the Purchases Day Book etc
4. From there the transactions are recorded into various ledger accounts in the General Ledger, Purchases Ledger, Sales Ledger or the cash book depending on their nature
5. At the end of each accounting period each account is the books is balanced off any balances are extracted and tabulated into a trial balance which matches credit balances against debit balances
6. When all the stages have been completed it is time to prepare financial statements:
   • these are also sometimes known as the final accounts quite obviously because they are prepared last in the cycle
   • These are made up of:
   • The Statement of comprehensive/Income Statement formerly known as the Trading and Profit and Loss Account which measures the performance of the business in profit/loss terms
   • The Statement of Financial Position formerly known as the Balance Sheet which shows the financial position of the business at the end of the accounting period
   • Although it is beyond the scope of Form 1-4 Level, it might be of interest to some to point out that businesses also prepare:
   • The A Statement of Cash Flows which measures the business’s performance in terms
   • A Statement of Changes in Equity which shows capital changes within the business during the accounting period
   • Financial Statements comprise of these four statements

• The entire process is repeated during each accounting period and for each transaction
• It is important to note that typically steps 5 and 6 are only carried out once at the end of the each accounting period although large businesses often prepare financial statements for each quarter (3 months)

Data Processing

Introduction to Data Processing

• Part of accounting involves data processing or processing data
• Data-refers to raw and unprocessed information for example a transaction event such as the sale of goods bought for resale in exchange for cash
• Information- is a term that is used to refer to data:
  • That is timely and accurate
  • Specific and organised for a specific purpose
  • Presented in a way and context that gives it meaning and relevant
  • Is arranged in a meaningful way that aids understanding
• In short information is processed data
• An example of information in accounting are the financial statements which are yielded after processing data in the form of transaction
• The net profit figure at the end of the accounting period is an example of a piece of useful information
• Although the exact steps taken in data processing vary all the steps can be grouped into the following steps:
• Data Collection- this involves the gathering of data e.g. in receipts and other source documents. It is important to make sure that data is complete and accurate at this stage otherwise the information obtained in the end will also be inaccurate
• Preparation– the collected data is analysed and prepared for input, this might involved summarizing transactions and preparing for double entry
• Input- the data is entered into records including books of original entry and ledgers, here data has to be in strict accounting format
• Data Processing- is the manipulation of items of data to produce meaningful information
  • Operations are performed on a given set of data to extract the required information in an appropriate form such as diagrams, reports, or tables
  • In accounting terms this involves balancing off accounts
  • Extracting the balances and preparing a Trial Balance
  • Preparing the Financial Statements
• Output and interpretation– this is when the processed information is presented and interpreted
• This often comes in the presentation of financial statements and the accompanying notes
• The final accounts are often compared to past performance, industrial average performance or against competitors
• Storage– the information is then stored for further usage and retrieval as and when needed
• Data processing can be done using manual methods or
• Increasingly through electronic methods
• Often though both manual processing and electronic processing are used