What is Accountancy
Accountancy is not a boring, nor dead subject – in fact, if you understand the basics, you will find that it is vibrant and can breathe new life into your struggling business. As soon as a transaction is processed, write it down or enter the information into a computer. Each slip of paper must be noted down and accounted for, whether it’s the cheque counterfoil for the stock bought or an invoice for your telephone account.
There are many sophisticated accounting software packages available – some are cheap, others are very expensive. These programs process whatever information you feed into the computer and distribute it to different modules – the modules representing different aspects of accounting. Here are a few examples – the most common modules:
Accounts Receivable (your debtors, your customers)
Accounts Payable (your creditors, your suppliers)
Inventory (your stock)
Sales Orders (customer orders)
Purchase Orders (your orders to suppliers)
Cash Book (your bank account)
General Ledger (an analysis of your different accounts – the accountability part)
Even if you opt for a manual accounting system – in other words, writing down your business transactions by hand, you will still need to have a separate set of books for each of the above modules.
The bottom line is that each business transaction must be written down in a concise way – your customer transactions belong in one module (set of books) and your creditor transactions in another. If you choose to do it manually, it may get complicated, especially if you have no prior experience – some modules “overlap” or share information. If you sell your stock to a customer, you have to record the reduction in inventory (normally on a cardex system), record the sales in the customer’s account and calculate what your profit is on the stock sold. This is where computerised accounting software come into their own – all you do is process an invoice and the software does all the calculations for you and this will probably save you time; depending on the size of your business, you can save at least 80% of the time used entering figures manually by processing it through an accounting package.
We will, however, in future articles, be looking at both manual and computerised systems, but not specific systems.
Accountancy is giving an account for all your business transactions and this you can only do if it is done correctly and regularly – as in weekly or monthly. Who would be interested in your accounts? The taxman, your bank manager, the auditors and when you try to purchase equipment on credit, the creditor will be most interested in your business affairs – whether you will be able to afford the repayments. By managing your books (Accountancy) you will be able to determine whether the extra $20 000 in your bank account is due to actual profit or if it is money due to go to the taxman or elsewhere. If you are unable to account for what happened in any given month, the taxman will not be sympathetic at all and the bank manager will lose interest if you ask him for an overdraft.
If your books are up to date, you will always know when your taxes are due and when you can expect payment from your customers. You will more easily be able to determine whether you can afford to buy additional stock and equipment and whether it is viable to hire additional staff. A quick calculation and perusal of a set of sales figures might show that although your customer base is growing, it does not necessarily mean more cash coming in – your overheads - expenses such as delivery costs, gas, salaries – could be increasing at a more rapid rate. One can then decide how to increase the profit margin – by increasing the selling price, for instance.
With Accountancy, it is important to know which business transactions qualify as an asset, liability, expense or income.
Here follows a brief explanation of each of these types of accounts:
Assets
An asset is an item of value, owned by a person who is able to prove purchase of that asset.
Delivery vehicles, furniture, computers, factory and in the case of a restaurant, for example, kitchen equipment such as the two microwaves, stove and refrigerator are assets; fixed assets.
Cash in the bank (if not in overdraft), petty cash (used to buy small items such as stamps) and amounts owing by your customers are assets - current assets.
Current assets are assets that can change considerable in value, whereas fixed assets are items of fixed value that depreciate over a certain period.
Liability
Owners’ Equity
Any money that is used to start your business is classified as the Capital of the business.
Any profit (the difference between income and expenses) is added (or subtracted if it’s a loss) to the total profit and whenever you, the owner, pays yourself a wage, the money is deducted from the equation. The Capital, profit and owner’s wages is called the Owner’s Equity.
Liabilities include any amount owing to another business or corporation. The creditors/vendors that you buy your supplies from are a liability. If your bank balance is in overdraft, it means that you owe your bank and therefor your bank account will qualify as a liability. If you take out a long-term loan from a finance house, this will be classified as liability, a long-term liability. Tax owing to the taxman and money paid to the taxman are liabilities.
Income
The total of all sales constitutes income. Any other income, such as rent and interest earned is regarded as income – money/funds coming in from daily business transactions.
Expense
This is the opposite income – expenses represent the amount of money/funds going out during the course of her normal daily business. Expenses include motor vehicle repairs, entertainment, delivery charges, print and stationery costs and a number of other monthly expenses that do not include stock/inventory expenses.
The Gross Profit is the difference between Income and Expense. If the Expenses are more than the Income, then it is called a Gross Loss.
I will reiterate what I said earlier– Accountancy is not dead and boring-it breathes life into any business– no business can survive without the presence of an orderly and dedicated method that enables you to write down each business transaction during a specific period of time – whether it is daily, weekly or monthly..
In future articles we will explore different terms used, Assets, Liabilities, Income, Expense, Gross Profit, Net Profit, Trial Balances, Debit and Credits and many other important Accounting information and the different sets of books required in Accountancy.
Meet Amarendra Bhushan, A leading Strategic Human Resource Consultent, MBA from American university of athens, greece, also editing The European journal of NRI finance magazine (The TRIBUNE).As one of the leading article writer, and corporate hotel professional. Advisor to various organizations and hotels. He is an elected member of south Indian hotel and restaurant federation. Now staying at ancient city of Athens Greece.abdhiraj@mail.gr,http://www.amarendra.5u.com, http://www.theeurope.blogspot.com
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