ACCOUNTING is as old as money itself, and various records have been kept in

historical records for thousands of years, from the Sumerian clay tablets, bible and other
written sources. It has the basic functions of

RECORDING: this is to store information and also in an orderly manner so that retrieval
of information is easily done.
The primary book for recording is known as the Journal, and subsidiary books also exist.

Classifying::Data has to be stored systematically, this is done in the Ledger. Usually

Double entry st stem is followed

SUMMARISING: this makes the data understandable, and consists of Trial balances,
Income statements and BALANCE SHEET. The Balance sheet alone does not convey
the full picture or summary and one needs other summaries to give more information.

FINANCIAL AND NON FINANCIAL TRANSACTING: Non financial transactions

dont get recorded, eg human resource acquisitions

ANALYSIS AND INTERPRETING: the figures interpreted for the end user

CHARTS and Graphs may be given.

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DIFFERENCE BETWEEN ACCOUNTING AND BOOK KEEPING:

The two have some things in common but they are not the same

Accounting deals with systems for recording and classifying data, while book keeping is
for recording and storing facts or part of the facts

Accountants often direct book keepers

Bookkeeping is mainly clerical. Accounting involves analytical skills. Accountants may

start as book keepers and move up with experience and knowledge gained on the job.
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a) Impersonal accounts relate to items like utility bills, rent, insurance and others. These
do not relate to any person and are call impersonal accounts

Personal accounts deal with transactions between two entities, like the business and a
customer, and would be kept in personal ledgers, eg sales and purchase ledgers

b) Real and nominal accounts:

The main difference is at the end of the accounting year:

A nominal balance is closed at the the end of the accounting year, while a real account is
not closed at the end of the year. The nominal account starts with a zero balance and does
not carry over, it is a temporary account.

Balance in a real account is not closed and is thereby called a permanent account

TRIAL BALANCE:it is a statement made by consolidating all ledger account balances

and debits and credits. Its purpose is to ascertain the accuracy of the books as both debits
and credits should tally.

The trial balance is made after the ledgers are closed, and the credits and debits recorded
separately for different accounts.

If the arithmetic is correct, both debit and credit should agree.

It also helps in locating accounting errors, and to verify the arithmetic.

The trial balance gives the summary of the finances, and can be used to prepare the final
accounts.

SUBSIDIARY BOOKS are needed for large operations and businesses in order to keep
track of various specialized transactions.

These books are maintained in chronological order, with transactions of similar types
kept in one specialized subsidiary book. This is done very easily instead of recording in a
ledger

Some of the subsidiary books are:

Day books, ( sales and purchaes)

Returns books

Cash books

Bills receivable and Bills Payable.

OBJECTIVES AND ADVANTAGES:

Saving of time by which several people can do the work by division of labour instead of
one clerk having to do all the entries.
Minimizes chance of error and fraud by one person, since several books are maintained
by different persons, collusion is less likely and errors can be detected.

Data retrieval is easy.

Of course now with computer data bases, the same thing is possible with linked data
bases, where a supervisory control or over view is possible in real time.

he four basic groups of ratios given as Liquidity, leverage, activity and profitability have
different connotations to different people in the business.

a)PROFITABILITY RATIOS involve the efficiency with which the business is carried
out. Low performance could be from bad sales leading to low profits. Due to
mismanagement and lack of control, expenses are not kept in check leading also to low
profits. Financial institutions look at these indicators to show whether capital is usefully
employed , and whether the earnings of the firm can cover the interest it has to pay for
borrowed capital. Hence it indicates if the firm can repay borrowings with any certainty.
Also owners would be interested in these ratios as they show the return on their
investment.

Some of the important profitability ratios are: ROI= overall profitability ratio= : return
on investment,, or Operating profit/capital employed

price to earning ratio, earnings per share, gross profit ratio,dividend yield ratio , operating
or expense ratios.

b)LIQUIDITY RATIOS: These figures deal with the solvency or immediate cash
availability to deal with day to day and short term operations, without having to apply for
loans. Essentially these are short term evaluations of the business. It is necessary for
the business to have this solvency or its operations may stop.

These figures are important for SUPPLIERS< BANKS, EMPLOYEES, OWNERS, Bond
holders, government, investors.

Some important ratios in this group are the Current ration= Current liabilities/ current
assets,

QUICK RATIO= Liquid assets/ current liabilities

SUPER QUICK ratio= cash and marketable securities/ quick liabilities.

These give a measure of the SOLVENCY of the business, and how quickly it can pay off
its bills.
c)ACTIVITY RATIOS: These give a measure of the efficiency of operations of a
business, for instance how effective it is in converting inventory to sales, which in turn
give cash. Also how effective it is in dealing with other assets and capital. This is
because the overall profitability depends on the turnover as also the rate of return on
capital employed

Some of the ratios are: Inventory turn over ratio, receivable turnover ratio, fixed assets
turn over ratio. debtors turn over ratio

d)LEVERAGE RATIO:Also known as capital gearing ratios, these indicate the debt:
equity mix of the capital structure of the company. Debt./equity ratio indicates the
proportion of fixed interest funds and the proprtion of dividend bearing funds. These are
from bond holders and preference share holders verses equity share holders. The ratio
indicates whether there is a proper balance, so that cost of equity is at a minimum.

Leverage ratio= Fixed interest funds/ equity shareholder funds.

This ratio is of interest to the equity shareholders because it shows what benefit they
could get from the earnings after the preference and bond holders are paid off.

MARGIN OF SAFETY:

In analysis of the sales of a business, it is defined as the (Total Actual sales- Break even
point sales).

The margin of safety is a useful measure from which the cushion of safety or amount of
flexibility it gives to a business for doing other investments, without falling into the no
loss no profit regime shown by the BEP or break even point.

It is easily seen from the break even chart, where a large Margin of safety indicates that if
a reduction in sales occurs, profit is still made.

If the margin is small, a loss in sales can adversely affect the business.

It is therefore a measure of the momentum of the business.

IN DECISION MAKING the size of the Margin of safety can be used in different ways:

--if MOS is small, selling prices can be increased, to the extent that demand does not fall.
--Alternatively the Fixed and /or the Variable prices can be reduced, since SP=
FC+VC+Profit
Since SP= FC+VC+Proft, production can be increased, at lower cost, by cahnging
Variable cost

More profitable products can be substituted for the unprofitable ones.

Hence a study of the Margin of Safety can be used to anticipate losses and make changes
accordingly.