The Accounting System (Copy)

1.2 The Accounting System – Cheat Sheet

Key Principles

1. Double Entry System:
   • Every transaction affects at least two accounts: a debit and a credit.
   • Total debits = total credits for every transaction.
2. Accounting Equation:
   • Assets = Liabilities + Equity
   • Represents the balance between a business’s resources (assets), the claims on those resources (liabilities), and the owners’ stake in the business (equity).
3. Books of Prime Entry:
   • Sales Journal: Records credit sales.
   • Sales Returns Journal: Records goods returned by customers.
   • Purchases Journal: Records credit purchases.
   • Purchases Returns Journal: Records goods returned to suppliers.
   • Cash Book: Records all cash and bank transactions.
   • General Journal: Used for all other transactions not recorded in the specific journals above.
4. Ledger Accounts:
   • Personal Accounts: Relates to individuals, businesses, and organizations (e.g., accounts payable).
   • Real Accounts: Relates to assets (e.g., cash, inventory).
   • Nominal Accounts: Relates to income and expenses (e.g., sales, rent).
5. Trial Balance:
   • A statement listing all ledger account balances to check if total debits equal total credits.
6. Full Accounting Records – Advantages:
   • Accurate financial reporting.
   • Legal and tax compliance.
   • Facilitates business decision-making.

   Disadvantages:

   • Time-consuming and costly.
   • Complexity in managing records.

Accounting Concepts

1. Business Entity: Business is separate from its owners for accounting purposes.
2. Historic Cost: Assets are recorded at their purchase cost, not their current market value.
3. Money Measurement: Only transactions that can be expressed in monetary terms are recorded.
4. Going Concern: Assumes the business will continue operating indefinitely.
5. Consistency: Accounting methods should remain consistent from one period to the next.
6. Prudence: Anticipate no profits but provide for all losses.
7. Realisation: Recognize revenue when earned and expenses when incurred.
8. Duality: Every transaction affects at least two accounts (debit and credit).
9. Materiality: Only significant transactions are recorded.
10. Objectivity: Financial statements must be based on verifiable evidence.
11. Matching/Accruals: Recognize revenue and expenses in the period they occur, not when cash is exchanged.
12. Substance Over Form: Record the economic reality of transactions, not just the legal form.

Computerised Accounting Systems

1. Advantages:
   • Faster processing.
   • Improved accuracy.
   • Real-time financial reporting.
   • Easier data storage and backup.
   • Integration with other business systems (e.g., payroll).
2. Disadvantages:
   • High initial and maintenance costs.
   • Requires staff training.
   • Dependent on technology (system failures, data breaches).

Data Security in Computerised Systems

1. Encryption: Secures data by encoding it.
2. Access Controls: Limits access to authorized users.
3. Backups: Regularly save data to prevent loss.
4. Firewalls: Protect systems from unauthorized access.
5. Audit Trails: Track changes and ensure accountability.

Summary

• The Double Entry System and the Accounting Equation form the basis of all accounting activities.
• Use of Books of Prime Entry and Ledger Accounts helps organize transactions.
• The Trial Balance ensures the accuracy of accounting records.
• Accounting Concepts provide guidelines for proper financial recording and reporting.
• Computerized Systems increase efficiency and security but come with their own costs and risks.