Understanding Business Accounting For Dummies, 2nd Edition (13 page)

The Controller also designs and monitors the accounting reports that go to the business's top-level executives, the chief executive officer of the business, and the board of directors. All tough accounting questions and problems get referred to the Controller. The Controller needs good people management skills, should know how to communicate with all the non-accounting managers in the organisation, and at the same time should be an ‘accountant's accountant' who has deep expertise in many areas of accounting.

Smaller businesses may have only one or two ‘accountants'. The full-time bookkeeper or office manager may carry out many of the duties that would belong to the Controller in a larger organisation. Smaller businesses often call in a chartered accountant in public practice to advise their accountants. The chartered accountant may function more or less as a part-time Controller for a small business, preparing the annual income tax returns and helping to prepare the business's external financial reports.

Chapter 2
:
Bookkeeping 101: From Shoe Boxes to Computers

In This Chapter

Understanding the difference between bookkeeping and accounting

Following the steps in the bookkeeping cycle

Managing the bookkeeping and accounting system

Getting down the basics of double-entry accounting

Deterring and detecting errors, irregularities, and outright fraud

M
ost people are pretty terrible bookkeepers just because they really don't do much bookkeeping. Admit it. Maybe you balance your chequebook against your bank statement every month and somehow manage to pull together all the records you need for your annual income tax return. But you probably stuff your bills in a drawer and just drag them out once a month when you're ready to pay them. (Hey, that's what we do.) And you almost certainly don't prepare a detailed listing of all your assets and liabilities (even though a listing of assets is a good idea for insurance purposes). We don't prepare a summary statement of our earnings and income for the year or a breakdown of what we spent our money on and how much we saved. Why not? Because we don't need to! Individuals can get along quite well without much bookkeeping - but the exact opposite is true for a business.

One key difference between individuals and businesses is that a business must prepare periodic
financial statements
, the accuracy of which is critical to the business's survival. The business uses the accounts and records generated by its bookkeeping process to prepare these statements; if the accounting records are incomplete or inaccurate, the financial statements will be incomplete or inaccurate. And inaccuracy simply won't do.

Obviously, then, business managers have to be sure that the company's bookkeeping and accounting system is adequate and reliable. This chapter shows managers what bookkeepers and accountants do - mainly so that you can make sure that the information coming out of your accounting system is complete, timely, and accurate.

Bookkeeping versus Accounting

Bookkeeping
is essentially the process (some would say the drudgery) of recording all the information regarding the transactions and financial activities of a business - the record-keeping aspects of
accounting.
Bookkeeping is an indispensable subset of accounting. The term
accounting
goes much further, into the realm of designing the bookkeeping system in the first place, establishing controls to make sure that the system is working well, and analysing and verifying the recorded information. Bookkeepers follow orders; accountants give orders.

Accounting can be thought of as what goes on before and after bookkeeping. Accountants prepare reports based on the information accumulated by the bookkeeping process - financial statements, tax returns, and various confidential reports to managers. Measuring profit is a very important task that accountants perform, a task that depends on the accuracy of the information recorded by the bookkeeper. The accountant decides how to measure sales revenue and expenses to determine the profit or loss for the period. The tough questions about profit - where it is and what it consists of - can't be answered through bookkeeping alone.

The rest of this book doesn't discuss bookkeeping in any detail - no talk of debits and credits and all that stuff. All you really need to know about bookkeeping, as a business manager, is contained in this chapter alone.

Pedalling through the Bookkeeping Cycle

Figure 2-1 presents an overview of the bookkeeping cycle side-by-side with elements of the accounting system. You can follow the basic bookkeeping steps down the left-hand side. The accounting elements are shown in the right-hand column. The basic steps in the bookkeeping sequence, explained briefly, are as follows. (See also ‘Managing the Bookkeeping and Accounting System,' later in this chapter, for more details on some of these steps.)

1.
Record
transactions
- the economic exchanges between a business and the other persons and businesses that the bookkeeper's business deals with.

Transactions have financial effects that must be recorded - the business is better off, worse off, or at least ‘different off' as the result of its transactions. Examples of typical business transactions include paying employees, making sales to customers, borrowing money from the bank, and buying products that will be sold to customers. The bookkeeping process begins by identifying all transactions and capturing the relevant information about each transaction.

Figure 2-1:
The basic steps and sequence of the bookkeeping cycle, including the accounting inputs and outputs.

2.
Prepare and collect
source documents
- transaction documentation that the bookkeeper uses to record the transactions.

When buying products, a business gets a
purchase invoice
from the supplier. When borrowing money from the bank, a business signs for an
overdraft
, a copy of which the business keeps. When a customer uses a credit card to buy the business's product, the business gets the
credit card slip
as evidence of the transaction. When preparing payroll cheques, a business depends on
salary schedules
and
time cards.
All of these key business forms serve as sources of information into the bookkeeping system - in other words, information the bookkeeper uses in recording the financial effects of the transaction.

3.
Record original entries (the financial effects of the transactions) into journals and accounts.