Nnabugwu Chizoba (Sustainability
Accountant and Development Practitioner)
The overwhelming need to work
towards enhancing the knowledge, skill, capacity and ability of the average
entrepreneurs and business operators, on the subject matter of book-keeping,
accounting and finance has giving birth to this piece. I consider this need as urgent.
This belief is strengthened by the fact that improvement in the focused area is
fundamental to raising the standard of business operations and the performance
of entrepreneurs and business people generally.
The above assertion is apt, in
view of the huge benefits accruable to the entrepreneurs and the business community,
from improved book-keeping, accounting and financial records that include but
not limited to: better forecast, enhanced budgeting and planning, improved
revenue profile and increased profit. The benefit encompasses effective and
efficient resource deployment: cash and material.
To say the least, improvement in basic
accounting skills by entrepreneurs and business operators is one sure approach
to advancing business activities significantly and adding desirable values in operations.
I have no doubt that the
terminologies, as contained below, are quite familiar, to most entrepreneurs
and business persons. My appeal, therefore, is for you to take time and read
through them. Don’t fall for any temptation that will make you take them for
granted. This will enable you to make the best out of this piece. The crux of
the matter is that abuses abound in dealing with the terminologies by the
entrepreneurs and business owners, who due to ignorance, propelled principally
by very low knowledge of what the words really represent and how they are treated
in book-keeping, accounting and finance, have not benefitted maximally from
them.
The terminologies are presented
below. Give them your best shut. They portend well for your business and
business operations generally. They are equally beneficial, to the general
reader. Savour them…
Transaction: When used in business and for the purpose of
accounting entries or records, it means no other thing than that event which
affects the “financial position of a
business”. For anything therefore to be considered a transaction in
accounting it must have a monetary effect on the business. The effect is either
an increase or decrease in the financial resources of the business.
A point to note here and
seriously too is the fact that the effect (increase or decrease) must be
associated directly with the business; not the owner or anybody else for that
matter.
Purchases: This is one word
that has been variously misinterpreted by entrepreneurs and business owners.
Purchases for the sake of book-keeping, accounting and finance entries or
records refer to the cost of buying goods, stock or inventories, specifically
for sale or merchandising in the ordinary of course of the business entity or
outfit.
For the trader or merchandiser,
purchases refer to the cost of buying finished goods for sale. And for the
Manufacturer, purchases stand for the cost of buying raw materials for
production purposes.
Consider a situation where a
dealer in cement buys cement for sale. Purchases in accounting is the cost of
the cement and is recorded in the purchases account. Similarly, if the cement
dealer buys a ceiling fan for the business, the cost of the ceiling fan will
not be found or recorded in the purchases book, because it is not considered as
purchases in accounting. The situation will not be same if the ceiling fan was
bought by a business operator that deals on ceiling fan or electrical electronics
or appliances.
By accounting principles; which
must be upheld at all times, there is a huge difference between the cost of
goods purchased for sale or raw material purchased for production and the cost
of buying machines, equipment, furniture/fittings, land, Television, radio,
car, and motor bike for the business. The cost of these items is regarded as
capital. They are treated as Assets and are capitalized in the statement of
financial position a business entity.
Note that the above has nothing
to do with whether the entrepreneur or business owner buys on credit or pays
cash.
Sales: This is another commonly misinterpreted word, when it comes
to business and accounting. To the business community, most of them regard and
treat sales as income from anything that has to do with sale of any item of the
business by the owner. This long held impression is wrong, and is very harmful
to a business.
Sales in book-keeping, accounting
and finance, refer simply to the income, revenue, earned (received or to be
received), when an entrepreneur or business owner sale goods, stock or any item
that falls under the ordinary course of the business. This explanation fits
better for the traders or merchandisers. For the manufacturing outfits, sales
refer to the amount earned from the sale of products produced.
Using the cement dealer as example,
the proceeds realized from the exchange of the cement with the buyers for
monetary value is regarded as sales and would be found or recorded in the sales
account.
In the event that the cement
dealer decides to sale the ceiling fan for any reason, the sale of it will not
be found in the sales account, as this is not regarded as sales.
Continue to keep in touch with
this Platform. More of this enlightenment packages has been organized in way
and manner that will help the entrepreneur and the business community advance
their business for meaningful impact and sustainable results.
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