Introduction to Booking Keeping and Accounting

What is Accounting?

Accounting is the process of recording, classifying, selecting, measuring, interpreting, identifying, and communicating financial data of an organization to enable users to make decisions.

What is Bookkeeping?

Bookkeeping is the systematic recording of transactions on a daily basis in the appropriate books of account. It is the process of recording data relating to accounting transactions in the accounting books.

Importance of Accounting:

1. Accounting Information can be used for decision-making.
2. It provides permanent records for all transactions.
3. It helps to determine the profitability indexThe profitability index (PI) is used to assess how much profit may come from a particular investment. It measures a proposed project's costs and benefits by dividing the projected capital inflow... More of a business concern.
4. Accounting Information is used for tax assessment.
5. It helps to prevent fraudulent practices.
6. The records show the income and expenditure.
7. Properly kept records will assist management in business planning.
8. It shows the total assets and liabilities of the business concerned.

Users of Accounting Information:

There are two (2) users of Accounting Information:

1. Internal users
2. External users

1. Internal Users:

These are those individuals or groups who are within the organization. They are:

(i) Owners
(ii) Managers
(iii) Management
(iv) Trade Union
(v) Employees

2. External Users:

These are those individuals or groups who use accounting information outside the organization. They are:

(i) The Public
(ii) Tax authorities
(iii) Government
(iv) Creditors and other financial institutions
(v) Competitors
(vi) Shareholders
(vii) Potential Investors

Differences between Bookkeeping and Accounting:

1. Bookkeeping refers to the systematic aspect of recording and classifying transactions whereas Accounting includes recording, classifying, summarizing, analyzing, and interpreting financial data.

2. Bookkeeping involves the routine recording of transactions in the simplest aspect whereas Accounting is more complex.

3. Bookkeeping is only a small part of the field of accounting and is limited in scope whereas Accounting has a wider scope and goes beyond the recording of transactions.

4. In bookkeeping, one can be a proficient bookkeeper in a few weeks or months whereas to become a professional accountant requires several years of study and experience.

5. Bookkeeping cannot help with decision making whereas Accounting information helps for decision making.

Accounting Cycle Steps:

Types of accounting periods for recording transactions include monthly and annually.

The correct order of the financial accounting process involves:

i. Recording: This is the first step where transactions are recorded in a systematic and chronological order in the books of original entryBook of original entry is an accounting book or journal in which invoices, vouchers, cash transactions and others are first recorded before they are transferred to ledger accounts. More, like journals and subsidiary books. Typical transactions include purchase orders, customer returns, sales receipts, payroll and bank deposits.

ii. Collecting: In this step, the recorded transactions are then posted into the respective ledger accounts in a classified manner.

iii. Analyzing: After recording and collecting the transactions, they are then analyzed to determine the financial position and performance of the business.

iv. Presenting: The last step is presenting the analyzed financial information in the form of financial statements such as the income statement, balance sheet, and cash flow statement.