Accounting as the Important Function of Every Business Organisation (Halfords company) - Essay Example

?Assignment 2 Contents Contents 2 3 2 (a) 3 2 (b) 4 3 (a) 6 3 (b) 6 3 (c) 6 Reference 8 Accounting is an important function of every business organisation. Accounting has various purposes and objectives. Among the various purposes, the main purpose of accounting is to record the transaction of the business enterprise in a systematic manner and to provide information about the financial position of the business enterprise to all its stakeholders (Mittal and Singal, 2006, p.1.4-1.5). Accounting’s main or primary purpose is to identify the activities of the business organisation, recording and measuring the transactions of the business and communicating the financial information to all the interested persons like the shareholders, investors, creditors, management, employees, government etc (Godwin and Alderman, 2010, p.2). The financial information generated from accounting in form of financial statements helps managerial decision making and other important investment decisions. 2 (a) Every organisation has to maintain certain important books of accounts. These books of accounts are used to record the business transactions. Halfords is company which is primarily involved in buying and selling bicycles. Thus Halfords will also have to maintain certain books of accounts. The main books of accounts which Halfords can maintain to record its transactions are journal and ledgers. Apart from journal and ledgers the company can also maintain sales day book and purchase day book. Among all the books of accounts mention in this section, journal is the primary book of accounts, therefore it is often known as the book of prime or original entry. All the transactions are first entered in the journal. The recording of the transaction in the journal is known as journal entry. The transactions are recorded in the journal as per the rules debit and credit also known as golden rule of accounting. Once the transactions have been entered in the journal, then those entries are transferred in the secondary books known as ledgers (Eisen, 2000, p.63). The transactions can be recorded in a more classified way in ledgers. The transactions recorded in the journal are further classified into different types of accounts and are posted to the respective accounts in the ledger as per the nature and type of accounts. Figure 1: Performa of a purchase account in a ledger (Source: National Institute of Open Schooling, n.d, p.125) Thus the ledger is the collection of accounts maintained by the company. The ledger provides balance of the particular account on a particular date like the amount of sales on a particular date can be found from the sales account. Apart from these main books the company can also maintain sales day book and purchase day book to record its credit sales and credit purchase respectively. 2 (b) Every business organisation usually had a number of business transactions. Similarly Halfords would also have a number of transactions during a particular accounting period. The most common transactions that the company would certainly have during an accounting period are as follows:- Cash sales: Cash sales denote selling goods and services on cash. This means that the amount of goods sold or services rendered is immediately received by the company. This transaction is recorded by debiting the cash or bank account and crediting the sales account. Cash purchase: Cash purchase signifies purchasing goods or services on cash. In cash purchase the amount for the goods purchased or services availed has to be paid immediately. This particular transaction is recorded in the books of accounts by crediting the cash or bank account and debiting the purchase account. Credit sales: Credit sales denote that the goods or services have been sold on credit. In credit sales the amount of goods sold or services rendered are not paid immediately but after a certain period of time (which is known as credit period). This particular transaction is recorded by debiting the debtor’s account (the person to whom the goods are sold) and crediting the sales account. Credit purchase: Like credit sales, credit purchase also denotes that the goods or services have been purchased on credit. The amount of goods purchased on credit is paid after a certain period of time. This transaction is recorded by debiting the purchase account and crediting the creditors account. Collection from debtors: When the goods are sold on credit, then the debtor that is the person to whom the goods are sold usually pays the price of the goods during or at the end of the credit period. When the amount is received from the debtors then the cash or bank account is debited and debtors account is credited as the dues from the debtors have been received by the company. 3 (a) Income statement shows the financial performance of the company during a certain financial year. A loss in the income statement generally means a net loss of the company during a particular period of time. Net loss can be defined as the excess of total expenditure incurred over the total revenue during a period of time. 3 (b) In a situation of loss, the main account which could rise in the income statement of Halfords is net loss. Apart from net loss, the company could also incur gross loss in the trading account in a situation of loss. Gross loss is the excess of direct expenses over sales revenue. In the income statement operational expenses and incomes are also recorded. Thus a loss situation can also arise due to excess of operating expenses over operating incomes which would result in operating loss. 3 (c) In case of a loss situation net loss would appear in the income statement. Net loss is the difference between total expenditure and total income in profit and loss account. In profit and loss account the total expenditure is the recorded by debiting the profit and loss account and crediting the account or expenses. In the same way the revenues are recorded by crediting the profit and loss account and debiting the account of revenues. The balance of the profit and loss account (excess of debited items over the credited ones) is termed as net loss. The net loss is generally deducted from the retained earnings. Therefore in an income summary net loss is recorded as follows: Retained earnings A/C-----------------------Dr To Income Summary (net loss) A/C The net loss in the profit and loss account is transferred to capital account Capital A/C-----------------------------------Dr To Profit and Loss A/C (net loss) In gross loss appears because of excess of direct expenses over sales. The gross loss from the trading account is transferred to profit and loss account in the following manner Profit and Loss A/C------------------------------------Dr To Trading A/C (gross loss) Reference Mittal, R. K. and Singal, R. S. (2006). Financial Accounting. India: FK Publications. Godwin, N. H. and Alderman, C. W. (2010). Financial ACCT 2010. USA: Cengage Learning. Eisen, P. (2000). Accounting 4th ed. USA: Barron's Educational Series National Institute of Open Schooling. Cash Book. [Pdf]. Available at: http://www.nos.org/srsec320newE/320EL7.pdf. [Accessed on: January 3, 2012]. Read More