From Business Transactions to Financial Statements

Business Transactions to Financial Statements

• The journey of a business's transactions from initiation to financial statements involves several key steps:

  • Transactions must be recorded in the accounting system during an accounting period.

  • Recorded transactions are later summarized into financial statements, which include:

  • Statement of Financial Position

  • Statement of Profits or Loss

• Beyond financial statements, businesses also need to prepare tax returns (e.g., VAT returns) and budgets, which assist in monitoring performance over time.

• An efficient accounting system can generate up-to-date reports, providing a real-time picture of the business's financial status, unlike simply storing receipts and invoices without processing them.

Accounting Software

• The transition from manual to computerized accounting systems simplifies the accounting process.

  • Knowledge of manual systems is foundational and aids understanding of computerized systems.

• Accounting software is divided into two main categories:

  • Off-the-Shelf Packages: Pre-made solutions that can be tailored to a business's specific requirements.

  • Bespoke Accounting Packages: Custom-designed software for unique business needs.

Modules in Accounting Systems

• Most accounting systems consist of multiple modules, with the General Ledger as the core module containing all accounts.

  • Example specific ledgers include:

  • Receivables Ledger

  • Payables Ledger

  • Non-Current Asset Register

  • Inventory System

• Advantages of Computerized Systems:

  • When one module is updated, all related modules are updated automatically, reducing the risk of errors.

  • Example: Creating a sales invoice in the receivables ledger updates the general ledger and the customer's account simultaneously.

Key Features of Computerized Accounting Systems

• Controls: Ensures data is recorded and processed accurately.

• Standing Data: Stable data that doesn't change frequently, such as customer lists and stock items.

• Account Codes: Unique codes assigned to different accounts (e.g., customers, suppliers, expenses).

• Each transaction's details and account codes must be entered correctly, but only one input is needed for the entire system to process it accordingly.

Accessing Accounting Systems

• Accounting software can be installed locally or accessed over the cloud:

  • Local Installation: Software is installed on specific computers.

  • Cloud-Based: Accessible from any device with internet access, enhancing flexibility and collaboration (e.g., software like Xero).