What are the differences between BOOK KEEPING AND ACCOUNTING ? – IMPORTANCE BOOK KEEPING AND ACCOUNTING
Meaning of Book Keeping:
Book-keeping from time immemorial has been defined as a science of recording business transactions in a systematic manner so as to exact the financial position of the business that can be easily ascertained at any time.
Book-keeping may be defined as the art of recording business transactions in a systematic manner so that the books of account will reveal at any time the financial position of the business to the owner and other stakeholders in the business.
Meaning of Accounting:
Accounting is the process of obtaining, recording, classifying, summarizing, reporting, interpreting, and presenting financial information in a manner that will facilitate informed decisions by the users of accounting information.
Boateng,(1884) ”accounting is the process of identifying, measuring, and communicating economic and financial information to permit informed judgment and decision by the users of the information”.
Origin of Accounting in Nigeria
Nigeria has a long-standing history of international trade even before colonization came to Africa. Back in the olden days, a properly organized system of trade and government was in existence in the ancient kingdoms of the South-south/ South-west, the Western part of Nigeria, and part of the Northern part (Benin, Oyo, and Borno, Etc).
The granting of the Royal Charter to Niger Company in 1886 necessitated the preparation of proper records by the company. From that time till the independence of Nigeria in October 1960, the law governing accounting in Nigeria was tailored after her colonial master (Great Britain). The Association of Accountants of Nigeria, which later became the Institute of Chartered Accountants of Nigeria, was established in 1965. The majority of the members were trained in Britain.
In 1965, the Federal government of Nigeria passed an Act of Parliament No.15 establishing the Institute of Chartered Accountants of Nigeria which was affiliated with the professional Institute of Britain and United State of America (USA).
Many Nigerians came back as professional accountants and became a member. One of the doyens of the accounting profession in Nigeria is Chief Akintola Williams. The Institution has about 26,000 Accountants as of December 2008 and more than 120,000 as student members.
The two major accounting professional bodies in Nigeria are ICAN and ANAN. The Association of National Accountants of Nigeria (ANAN) was formed in 1979 with its headquarters in Lagos, Nigeria.
In 1982, Nigeria Accounting Standard Board was born to set standards to guide accounting operations. Members include:
- Central Bank of Nigeria
- Ministry of Finance
- Nigeria Accounting Teachers Association
- Chamber of commerce
- Office of the Auditor General etc.
NEED FOR BOOK-KEEPING AND ACCOUNTING:
The recording phase of accounting is known as book-keeping. The practice of accountancy will be virtually impossible if there is no day-to-day recording of financial transactions as they occur.
- Keeping Accounting records as a soul of the business: Recording of relevant information in accounting is the pivotal backbone of accounting principles. The recording provides both accounting/financial information to members of the public who are interested in the business through the financial statement. It also helps the management’s decision-making.
- STOCK VALUATION
Stock Definition: Stock may be seen as any item whether raw materials, work–in–progress, or finished goods kept in store for resale or as input for further productions. Specifically stock will consist of :
- Finished goods purchased for resale
- Indirect materials (e.g stationery)
- Raw materials (also referred to as direct materials)
- Work in process or work in progress
- Finished goods manufactured by the business and yet to be sold
METHODS OF STOCK VALUATION: Bookkeepers use various methods for valuing stock. Four ways in which you can do this are:
- FIFO (First In, First Out): Assumes first (oldest) item put on the shelf is the first one sold.
Example: A firm has a stock of 3,000 items at the beginning of an accounting year .The items were valued at N3 each .purchases and sales during the year were as follows:
- January :purchases 15,000 units @ N3.50 =N52,500
- February :purchases 25,000 units @ N4.00 =N100,000
- January : sales 13,000 units @ N4.50 = N58,500
- February :sales 28,000 units@ N5.00 = N140,000
Calculate the: (i) cost of goods sold
(ii) value of closing stock of goods
- Cost of goods sold
3,000 units of the opening stock cost N3.00 each =N9,000
10,000 units sold from January purchases N3.50 each =N35,000
5,000 units sold from January purchasesN3.50 each =N17,500
23,000 units sold from February purchases N4.00 each =N92,000
(ii) value of closing stock
2,000 units of February purchases remained unsold @N4.00 =N8,000
- LIFO (Last In, First Out): Assumes last (most recent) item put on the shelf is the first product sold.
Example : same as under FIFO
- Cost of goods sold
13,000 units sold from February purchases N4.00 = N52,000
12,000 units sold from February purchases N4.00 = N48,000
15,000 units sold from January purchases N3.50 =N52,500
1,000 units sold from opening stock N3.00 =N3,000
(ii) value of closing stock
2,000 units of the opening stock remained unsold @ N3.00 =N5,000
- Weighted Average Cost (WAC) Method: You don’t need to worry about what item came in first or last. Average the cost of stock when calculating stock value.
Example: same under FIFO
Month units unit cost total cost
January (opening) 3,000 3.00 9,000
January (purchases) 15,000 3.50 52,500
February (purchases) 25,000 4.00 100,000
Total 43,000 161,500
Weighted Average Cost =161,500/43,000 = N3.76
- Cost of goods sold
Number of units sold =41,000
Weighted Average Cost per unit =N3.76
Cost of all units sold =N3.76×41, 000 = N154, 160
- Value of closing stock
Number of units of closing stock =2,000
Weighted Average Cost per unit = N3.76
Value of closing stock = N3.76X2,000=N7520
Specific identification: Track how much you paid for each individual item to determine stock value.
Valuation of Asset: No organization keeps proper record without taking into cognizance her Asset. To be able to ascertain the cost and usefulness (input) of the assets to the organization. It helps to determine the life span of that asset and the depreciation, as well as when to replace such an asset
- Determine debtors and creditors: It shows an accurate standing position of a business in relation to its customers i.e. what is owed and what is owned by the firm.
- Conservation of assets: Bookkeeping enables a firm to determine the salvage value of an asset. It helps an organization to know when to dispose of and replace an asset to avoid low production. e.g. plant and machinery, building, etc.
The need for Book-keeping and Accounting cannot be over-emphasized.
THE IMPORTANCE/NEEDS OF BOOKKEEPING
- It is for easy reference of business financial records.
- It reveals the profits and losses position to the company through trading profit and loss account.
- It provides information to members of the public who are interested in the business through the balance sheet.
- Auditors use the books to issue their audit reports.
- The records help in management decision-making.
- The records project the image of the business to the public.
USERS OF ACCOUNTING INFORMATION
Financial statements of organizations are of interest to various users whose information needs differ. Among the users are:
- Tax authorities
- Financial analysis
- Government agencies
The customers demand for financial statement to check the price of the products, quality and reliability of the products.
Owners or shareholders need the financial statement to ascertain the performance of the firm to inform the decision-making.
The supplier needs the information regarding the liquidity of the firm as this will determine the firm’s ability to pay for goods supplied.
They require financial information for the purpose of assessing the tax liability of the firm.
Banks and other lending institutions are concerned with the information regarding the ability of the firm to pay interest on loans collected.
The government needs the accounting information to keep the statistics of the economic development to ascertain the rate of growth of the nation.
They need the financial statement to enable them to decide how secure their job is and the ability of the firm to pay their salary.
QUALITIES OF ACCOUNTING INFORMATION
Timeliness: Financial statements must reach the management in time for the purpose of decision making.
Relevance: The financial statement must contain information that is relevant to the users of the accounting information
Comprehensiveness: The accounting information must be detailed for the users to have access to what they need.
Reliability: Accounting information should be void of errors, to enable the users get the right information. Etc
LIMITATIONS OF ACCOUNTING INFORMATION
The limitations of accounting information to varieties of users are not easily traced to any accounting records. Because accounting information is historical in nature .ie does not record current or future events. The following are the limitations:
- Quality of Staff: The financial information does not capture the quality of staff or labour.
- Inflation:The effect of the change in the price of a commodity due to inflation, does not give the true picture of the financial statement, since records are based on historical cost and not current market price.
Organization uselessness: The managerial faults and conflict of interest among staff are not reported in the financial statement.