How to

DYNAMICS OF A BUSINESS and ACCOUNTING CYCLE

Rachael Dickson Written by Rachael Dickson · 1 min read >

The language of business is Accounting.

Internal Business Dynamics
1. Organizational Beacons (Mission, values, core values or objectives of a company/organization)
2. Owners Requirements (Profit, Productivity, Revenue)
3. Strategy: Understanding your current position and vision, knowing how to get there (strategy), and how do we implement this strategy (Company policies, Resources)
4. Resources: A critical resource is data.
5. Outcomes: Manage limited resources to achieve our outcomes (profit, or loss; if the loss is continuous, then a company needs to go back to level 3 and re-strategize).

Performance is impacted by the quality of the decisions being made. Time is a critical factor.

Decisions drive a business. When starting a business, you should proceed as follows:
-Be knowledgeable about the business (generate ideas).
-Carry out a feasibility research study or report to know the viability of the business.
-Get capital (finance); this could be debt or equity finance.
-Use the capital to buy and/or purchase assets.
-Use the assets to generate revenue and carry out various operations in the company.

Accounting Cycle
The whole process, from capturing information in the sourcing of documents to the preparation of financials,

Stage One– Source Documents (Collect data)
Stage Two– Journal (Recording and transferring)
Stage Three– Ledgers (Books of accounts)
Stage Four– Trial balance (Debits and Credits should be checked)
Stage Five– Adjustments like closing stock, and depreciation (When new information has come in)
Stage Six– Closing account and stock valuation
Stage Seven– Preparation of the Final Account

The Purpose of the accounting cycle
1. Monitor the progress of your business
2. Prepare your financial statements
3. Identify sources of your income
4. Keep track of your deductible expense
5. Keep track of your basis in the property
6. Prepare your tax returns
7. Support items reported on your tax returns

An accountant cannot verify anything without source documents (evidence) and cultivating a good data culture (keeping records in order). By law, directors are in charge of financial statements, but accountants prepare the statements.

Key Concepts
a. Source Documents: Where the transactions are captured/recorded (i.e., invoices, receipts, bills, etc.)
b. Transaction: Any event that has a financial impact on the business and can be measured reliably.
c. Journal: The chronological accounting record of an entity’s transactions.
d. Account: An account is a unique record for each type of asset, liability, equity, revenue, and expense. The accounts can be classified into personal accounts (Receivables, Payables, Capital, Bank) and Impersonal accounts (Real A/C (Motor vehicles, Furniture) or Nominal A/C (Revenue/Expenses)).
e. Chart of accounts: This is a complete listing of every account in an accounting system.
f. Accounting system: This is a system used to manage the income, expenses, and other financial activities of a business. The accounting system may be manual or automated.
g. Ledger: A book that contains the accounts for the transactions of the business. The book of accounts and their balances. We record the information from the source documents to the books of accounts (ledgers).
h. Posting: Copying amounts from the journal to the ledger.

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