1. Explain the nature of accounting system.

    The purpose of the accounting system is to keep the track of transactions and recording revenue and expenses of the company. It helps in recording, analyzing and retrieving the financial data. On the basis of financial status and financial reports important decisions of the company are made. The basic purpose of accounting system is the identification of all the activities which may impact the companies financially. Moreover, accounting system also provides a proper way to the companies for the monitoring and handling financial data like all data is arranged in journal entries and ledger. This also increases the internal check on the organizations.

     The accounting system can be tailored to the needs of any individual, non-profit organization, small or large business. This course will concentrate on the needs of small business. A business is an economic entity created for the purpose of increasing the wealth of its owner or owners by generating profits from the provision of goods and/or services. A small business is one where all major decisions are the responsibility of one, two or a few people who are usually the owners. With the help of accounting, owners can take countless important decisions and make right decisions on the right time.

     An accounting system is a process whereby a specific output is produced by a given input. In an information accounting system, data is processed to provide information. The aim of an accounting system is to record the transaction data and then to process this data to provide information that is ultimately collected in the financial and management reports of the enterprise. There are two stages in the development of an accounting system, namely systems analysis and system design.

     In the system's design process the system is designed to comply with the specifications determined by systems analysis. A good accounting system must comply with at least the following fundamental requirements. The system must provide decision makers with timely and accurate information relevant to the responsibilities and requirements; the internal control measures must be adequate to ensure the protection of assets and the provision of reliable information and the system must be sufficiently flexible to accommodate changes in the volume of activities and in the operating procedures without requiring drastic modifications.

2. Differentiate account from T-account.

     Accounting records about events and transactions are recorded in accounts. An account is a record of financial transactions for an asset or individual, such as at a bank, brokerage, credit card company, or retail store. It is a formal record that represents, in words, money or other unit of measurement, certain resources, claims to such resources, transactions or other events that result in changes to those resources and claims. It refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages to which debit and credit entries are chronologically posted to record changes in value.

     While T-account is the simplest form of an account, shaped like the letter T, in which increases and decreases in the account can be recorded. It is a visual aid used to represent an account in a general ledger. Its common use is in preparing adjusting entries (accruals and deferrals). It is an individual record of increases and decreases in a specific asset, liability, or owner’s equity item. It is consist of three parts: title of account, debit (left side) and credit (right side). It is referred as T-account because the alignment of these parts of an account resembles the letter T.

EXAMPLE OF T-ACCOUNT

3. State the basic rules of debit and credit.

     Debit and credit are two actions of opposing nature that are relevant to the process of accounting. An element (account) that is effected by an accounting transaction is either debited or credited (with an amount that is reflected in the transaction) depending on the nature of the account and the rule applicable to it.
Debits are a component of an accounting transaction that will increase assets and decrease liabilities and equity. Credits are a component of an accounting transaction that will increase liabilities and equity and decrease assets. We can put this into an easier format:

     • Credits increase liabilities and equity; credits decrease assets.
     • Debits decrease liabilities and equity; debits increase assets.

     Left-hand side is known as debit and right hand side is known as credit. The essential rules are, for every debit there must be an equal credit and of course, for every credit there must be an equal debit. Debits and credits must balance always (Debit = Credit).


4. What is the importance of a double-entry accounting?

     Double-entry accounting is a standard accounting method that involves each transaction being recorded in at least two accounts, resulting in a debit to one or more accounts and a credit to one or more accounts. Double entry accounting is important since it provides a method for quickly checking accuracy because the sum of all accounts with debit balances should equal the sum of all credit balance accounts. It is a method of record-keeping that lets you track just where your money comes from and where it goes. Using double-entry means that money is never gained nor lost it is always transferred from somewhere (a source account) to somewhere else (a destination account). Double entry accounting is a "must have" feature in financial software for small businesses. There are two important rules about double-entry recording system:

     • Assets = Claims (Liabilities and Owner's Equity)
     • Total Debits = Total Credits


5. Discuss the role of accounting records.

     Accounting records are manual or computerized records of assets and liabilities, monetary transactions, various journals, ledgers, and supporting documents such as agreements, checks, invoices, vouchers, which an organization is required to keep for certain number of years. Accounts are used to record transactions evidenced by documents and to express such transactions. All of the documentation and books involved in the preparation of financial statements or records relevant to audits and financial reviews.

     These are records of a firm's financial position that reflect any changes in that position. Examples include such things as source documents, accounting journals, general ledgers, along with the financial statements like the income statement, balance sheet, statement of retained earnings, and statement of cash flows.