CAT / FIA FBT Syllabus C. Accounting And Reporting Systems, Controls - Main accounting & reporting functions - Notes ^{2 / 6}

Whenever a business transaction takes place (a sale or a purchase, or payment of wages, etc.), there is a need to record the transaction in the accounting records.

The transaction is first entered in the books of prime entry (or ‘books of original entry’).

The main books of prime entry are:

• the purchases day book

• the sales day book

• the cash book

• the petty cash book

• the journal

On a regular basis (e.g. monthly), the day books are totaled and the totals for the period are entered into the ledger accounts.

For example, if the sales day book is totaled at the end of each month, the total sales for the month are posted into the ledger accounts of the business.

At the accounting year end of the business, the balance is calculated on each ledger account, and these balances are taken, with any necessary adjustments as recorded in the journal, to become the financial statements of the organisation for the period.

The main financial statements produced each year are:

• a balance sheet statement of financial position at the year end, showing the assets owned and the liabilities owed, and how these net assets are financed.

• an income statement of comprehensive income for the year, showing the revenues earned and the costs incurred, leading to the net profit or loss arising for the year.

• a cash flow statement, statement of cash flow summarising the cash receipts for the year and the cash payments paid out, to help readers of the accounts to understand the liquidity of the business.

Companies must send a copy of their financial statements to their shareholders each year.

Large companies must appoint external auditors each year to give their independent opinion on whether the published financial statements have been drawn up properly and whether they give a true and fair view.

GAAP (Generally Accepted Accounting Practice) is a set of rules governing accounting.

The rules may derive from:

• company law

• accounting standards

• international accounting standards and statutory requirements

• stock exchange requirements