LCCI 2020 MENTORING PROGRAM

INTRODUCTION TO ACCOUNTING & BOOKKEEPING

Types of Business Organization

One of the first decisions that a person(s) needs to make is how the company should be made and what type
it should be.

The four basic legal types of ownership for small businesses are a Sole Proprietorship, Partnership,
Corporation, and Limited Liability Company.

There are advantages and disadvantages as well as income tax ramifications associated with each type of
organization.

We are not going to enter this area fully, but a brief description of the main two different types of organization
and what they are is what we are going to look into.

 Sole Proprietorship

Most small businesses start out as sole proprietorships. These companies are owned by one person
who is normally active in running and managing the business.

 Partnership
A partnership is two or more people who share the ownership of a single business. To avoid
misunderstandings about how profits/losses are shared, who's responsible for what, and other
management, ownership and operating decisions, the partners normally have a formal legal
partnership agreement.

Bookkeeping

Bookkeeping is the way of recording and classifying business financial transactions (activities).

In simple language - it is maintaining the records of the financial activities of a business or an individual.

Bookkeeping's objective is simply to record and make financial transactions into a usable form that provides
financial information about a business or an individual.

If you are going to be in business, you must know how to keep score. Basic bookkeeping will be a great way
to keep your business records until you expand and need a bookkeeper or an accountant.

To run a business and know what, where, and when to take corrective actions, you need business
information. How do you get and where do you find this information? You will not, if you do not keep accurate
and current records about your business financial activities (bookkeeping).

Proper bookkeeping is important to sustaining and expanding a business. Without it, you run the risk of not
having enough money to run the business, wasting money, and missing out on opportunities to expand. The
purpose of bookkeeping is to help you manage your business and to enable tax agencies evaluate your
business activity. If your bookkeeping achieves both objectives, it can - and should - be as simple as
possible.

Use of Technology in keeping financial records

It is imperative to note that the use of technology in record keeping is the way to go in this post COVID 19
era. There are several accounting Apps that can not only record transactions, but send invoices, track
payments, and perform other tasks.
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Users of Financial Information

Who needs financial information about a business besides the owner(s)? Users can be grouped into two
broad categories namely internal and external users.

Internal Users

Internal users are the managers and the owners and employees who work for the business.

External Users

External users include lenders and other creditors (suppliers), investors, customers, and governmental
regulatory and taxing agencies.

Users need accounting information to make sensible decisions. Lenders and other creditors want to make
sure that they will be paid back for the credit that they have given to a business. You need to provide them
with financial information as a basis for their loan decisions. Similarly, customers want to make sure that the
business they are buying products or services from is going to be around and not be in such a poor financial
position to have to close its doors. Other users have their own reasons for using this financial information.

Accounting

Accounting is the art of analyzing, recording, summarizing, reporting, reviewing, and interpreting financial
information.

Accounting Period

This is the period for which an organization prepares its internal and external accounts. For internal
accounts, it may be a monthly or a quarterly (3months) basis. For external accounts it is normally a period of
1 year (12months).

Types of Bookkeeping Systems

A business needs to determine the type of bookkeeping system that will be used for recording their business
transactions. Many small businesses start out using the single-entry system.

 Single Entry System

The single-entry system is an "informal" accounting/bookkeeping system where a user of this system
makes only one entry to enter a business financial transaction. It generally includes a daily
summary of cash receipts and a monthly record of receipts and disbursements (worksheets).

A bank book, for example, is a single-entry bookkeeping system where one entry is made for each
deposit or check written. Receipts are entered as a deposit and a source of revenue. Checks and
withdrawals are entered as expenses. To determine your revenues and expenses you have to
prepare sheets to summarize your income and categorize and summarize your different types of
expenses.

The emphasis of this system is placed on determining the profit or loss of a business.

It got its name because you record each transaction only once as either revenue (deposit) or as an
expense (check). Since each entry is recorded only once, debits and credits (recording method
required for the double entry system) are not used to record a financial event.

While the single-entry system may be acceptable for tax purposes, it does not provide a business
with all the financial information needed to adequately report the financial affairs of a business. But
for the purpose of this training, single entry system is advised.

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  Double Entry System

The double entry system is the standard system used by businesses and other organizations to
record financial transactions. Since all business transactions consist of an exchange of one thing for
another, double entry bookkeeping using debits and credits, is used to show this two-fold effect.
Debits and credits are the devices that provide the ability to record the entries twice.

The double entry system also has built-in checks and balances. Due to the use of debits and credits,
the double-entry system is self-balancing. The total of the debit values recorded must equal the total
of the credit values recorded.

This system, when used along with the accrual method of accounting is a complete accounting
system and focuses on the income statement and balance sheet. This system has worldwide
support as the system to use by businesses for recording their financial transactions.

It got its name because each transaction is recorded in at least two places (accounts) using debits
and credits.

Methods of Accounting

Now to start you will need to decide what basis/method of accounting your business will use to track
revenues and expenditures. There are two major types:

 Cash Basis Method: This is what the name implies; you recognize income when you receive the
cash and you recognize expense when you receive the bill. Most service businesses operate on the
cash basis because it is much simpler to understand and account for.

 Accrual Method: Here you match revenue with expense regardless when the cash may or may not
be collected. If you sell a product to a customer and he does not pay you for 30 days, the sale is recorded
in the books on the day that you made the sale. When the money comes in the "accounts receivable"
(debtors) account is then turned into cash. The same with expenses: if you incur an expense on one
month but do not pay until the next month, the expense will be recognized in the month which you
incurred the expense. If you are in manufacturing or deal with inventory, the internal revenue service
generally requires that you be on the accrual basis.

The difference between the two methods used for recording revenues and expenses results from when the
business transaction is recorded in the "books" (timing). A business using the accrual method will record
revenues and expenses in their "books" before a business using the cash method. In other words, unlike the
cash method, they do not wait until they get paid by the customer or wait until they pay a supplier to record
the transaction.

The Single-Entry bookkeeping system is used along with the Cash Method of accounting. Debits and
Credits are not used to record financial events.

The Language of Bookkeeping

Knowing the following terminology and definitions will enable you participate and understand financial
matters concerning your business.

Assets:-
The properties used in the operation or investment activities of a business.

Additional Explanation: Assets include physical and non-physical things. Things you can physically see and
touch such as vehicles, equipment, and buildings. Non-physical things are like pieces of paper (sales
invoices) representing loans to your customers where they promise to pay you later for your services or

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product. Examples of assets that many individuals have are cars, houses, furniture, TV's, and appliances.
Some examples of business type assets are cash, accounts receivable (debtors), inventory (stock), land, and
equipment.

Liabilities:-
This is the amount the business owes to others. It includes claims by creditors to the property (assets) of a
business until they are paid.

Additional Explanation: Usually one of a business's biggest liabilities is to suppliers where a business has
bought goods and services and did not pay immediately. Another good personal example is a house rent.
Very few people own their own home. This rent is another example of a personal liability. Some examples of
business liabilities are accounts payable (creditors) and rent payable.

Owner's Equity also called Owner's Capital:-

The owner's rights to the property (assets) of the business; also called proprietorship and net worth. It is the
assets left for the owner assuming all liabilities (amounts owed) have been paid. It is also the money the
owner used to start the business.

Revenue (Income):-
These are the amounts a business earns by selling services and products also called Turnover. It is the total
of amounts collected or to be collected from customers for services and/or products.

Additional Explanation: Individuals can best relate by thinking of revenue as their earnings/wages they
receive from their job. Most business revenue/income results from selling their products and/or services.

Expense (Cost):-
Informal Definition: The costs of doing business. The things we used and had to pay for or owe people to run
our business.

Additional Explanation: Some examples of personal expenses that most individuals are familiar with are
phone, light, clothing, food, and repairs. Some examples of business expenses are materials to resell, office
supplies, salaries & wages, advertising, shop rental, and utilities like light and water.

Owner's Investments:-
These are the additional amounts, either cash or other property that the owner puts in his business.

Additional Explanation: Although these amounts can be kept up with as a separate item, they are usually
recorded directly in the Owner's Capital Account. In other words, immediately put into Equity's account.

Keeping separate business records

In a small business you should, before you start, set up a business bank account even if you are a sole
proprietor. It is important to keep your business records separate from your personal records. This will make
it easier for you to pull records together to prepare your income statement when the time comes. You can
open your Company Bank accounts, by using a current account and or a savings account for operating your
business.
Records to be kept

The following are the basic records needed to be kept by a small business:
 Revenues and Expenses
 Bank Expenditures

 Cash Expenditures

 Inventory Records

 Accounts Receivable

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 Accounts Payable

Revenues and Expenses

Your business will most likely use a Revenue and Expense Journal rather than Ledger to keep track of how
much money is going out, where it is going, and what is coming in.

A Revenue and Expense Journal is used by most small businesses and is single-entry accounting --
recording receipts and expenditures only. Single-entry accounting can be kept on paper (e.g. a notebook) or
computer.

Bank Expenditures
Cash spent in your business needs to be accounted for if you want to record all business expenses each
year.

These are expenses that are paid for through your business’s bank account. Examples of these are payment
for your goods for resale, rent of space, cost of equipment, repairs of equipment, petrol for generator, etc.

Cash Expenditures

You can keep a petty cash record by writing a check to petty cash and keeping a list of each expense paid
out of petty cash.

Inventory (stock) Records

Inventory (Stock) is the goods bought for resale in the normal course of a business’s operations.

Keeping on top of your inventory (stock) records will enable you to prevent stealing, maintain inventory levels
to a minimum, and monitor when to buy, among other things. The important stock information you need to
have is:

 date purchased,
 stock number of items purchased,
 purchase price, date sold, and
 Sale price.

Methods of managing and valuing inventory/stock

There are two main methods used to manage stock and they are called FIFO and LIFO.

FIFO means First-in, First-out meaning the oldest/earlier stock are recorded and sold first.

LIFO means Last-in, First-out meaning the most recent or latest stock are recorded and sold first.

The method approved by the Accounting Regulators is the FIFO.

Accounts Receivable (Debtors)

Accounts Receivable is the total amount/money being owed by customers of the business arising from
selling goods on credit. Customers who buy on credit are called debtors and recording/monitoring them will
give your information on the balance they owe at any time. It is essential that you must have the following
information.

 invoice date,

 invoice number,

 invoice amount,
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  date and amount paid,

 balance (if applicable), and

 Customers’ names and addresses.

Accounts Payable (Creditors)

Accounts payable are debts owed by your company for goods and services. Keeping track of what you owe
and when it is due will enable you to establish good credit and hold onto your money as long as possible.

Business owners with few accounts payable items use accordion file folders labeled with dates to keep track.
Other small firms simply pay bills twice per month and keep all bills in a "To Pay" folder. Regardless of the
system you choose, you should retain the same information about accounts payable as in the accounts
receivable above.

Income Statement

An income statement (sometimes called a profit and loss statement) lists your revenues and expenses and
tells you the profit or loss of your business for a given period.  If you would like to try creating an income
statement yourself for your business, you can use the spreadsheet template, contained in the handout file,
as a starting point.

Profit is the amount arrived at when your income is more than your expenses and Loss is the exact opposite
in that we made less than we spent.

Your Company Name]

Income Statement
For the Year Ended [ Date, month 2013]
Revenue:        
  Gross Sales       N0.00
     
       
           
Cost of Goods Sold:    
  Opening Stock   N0.00    
  Add: Purchases   N0.00
  Transport of goods   N0.00  
    Other Expenses   N0.00  
        N0.00    
  Less: Closing Stock   N0.00    
  Cost of Goods Sold       N0.00
           
  Gross Profit (Loss)       N0.00
           
Expenses:        
  Advertising   N0.00    
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   Bad Debts   N0.00    
  Bank Charges   N0.00    
  Delivery Expenses   N0.00    
  Depreciation   N0.00    
  Local Government Rates   N0.00    
  Insurance   N0.00    
  Miscellaneous   N0.00    
Office Expenses N0.00
  Salaries   N0.00    
  Payroll Taxes (PAYE)   N0.00    
  Permits and Licenses   N0.00    
  Postage   N0.00    
  Professional Fees   N0.00    
  Rent     N0.00    
  Repairs   N0.00    
  Telephone   N0.00    
  Transport &Travel   N0.00    
  Utilities e.g Water and Light   N0.00    
  Vehicle Expenses   N0.00    
  Wages and Salaries   N0.00    
  Total Expenses       N0.00
  Net Operating Income       N0.00
             
Other Income:        
Interest Income(Savings Account
  Interest)   N0.00    
  Total Other Income       N0.00
Net Income (Loss)       N0.00
             

Tax liability issues:

There will be several tax liability matters that you and your accountant will need to deal with:

 Income taxes. Since you are starting as a sole proprietor you will be reporting your business activity
to your State Internal Revenue Service. The sole proprietor will pay Personal Income Tax on this
income.
 VAT Returns. VAT means Value Added Tax is 5% tax on income/sale/turnover. This would have to
be paid to the Tax Office every month on or before the 21st of the month after the sale.

 Payroll taxes. When you have employees, you will need to file payroll tax returns called Pay As You
Earn. (PAYE).

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 Also, in every state there are local and state taxes that are required for example, Withholding tax,
Development levy, Business Premises levy etc. There may be other taxes that are unique to your
local situation.

Tola Gbogboade
June 2020
0809 232 0855
[email protected]