Many small businesses and self-employed individuals question whether they should keep their accounting records up to date like big businesses. The simple answer to this is that every business and self-employed individual, irrespective of their size, should keep their records up to date. This article will explain why everyone should have their accounting data up to date.
So what are accounting records?
Accounting records shows information about your income, expenses, assets and liabilities. Apart from these, any other type of transaction which has a monetary value, irrespective of this nature, is likely to be considered as part of the accounting records.
Yet, there is no universal definition in place which surgically defines accounting records. Many also consider this as a catch phrase for all documents which in one form or another collects business information.
Different types of accounting records
Generally speaking, accounting records come into two forms:
- Single Entry;
- Double Entry.
Single entry is deemed to be the more simplistic form and is mostly suitable for the smallest of business operations such as self employed individuals.
On the other hand, double entry requires that each and every transaction should be accompanied by at least two entries, a debit and a credit. The aim is to have the books balanced. As a general rule, the total debit entries and the total credit entries of any given business should match to the cent without any exceptions. If there is a difference, it implies that an entry was recorded incorrectly. The double entry is much more suitable to capture mistakes and fraud in a business.
Transactions are the starting point for any accounting record. It refers to the event that took place being a sale of an item, purchasing a capital asset or depreciating it etc... It is whatever the business did to transact.
Transactions are then transposed into journals. Not all transactions should be translated as a journal. Whether or not a transaction should be recorded as a journal depend on factors such as whether or not the transaction was a monetary transaction or not. Certain judgements based on knowledge of accounting regulations is required to correctly analyse and determine which transactions to record.
When recording each journal, one has to record it into a specific account. If a business bought stationery from stationery 1 and did photocopies from stationery 2, both journals should be recorded within the Stationery Account. Typically, accounts have account codes or account numbers and account names.
What accounts to have, what to name them, what number to give them and how many each and every business should have depends on the business in question and subject to the preferences of who is inputting the journals.
Different accounting ledgers exist and they group within them a number of similar accounts. Some examples are sales ledgers, purchases ledger and general ledger. Nowadays, ledgers can be easily thought of as a number of journal entries grouped together by type. For instance, as their name imply, the sales ledger is a collection of journal entries in relation to sales.
It was only a few decades ago, when journal entries where actually recorded on physical ledgers (books) hand written. To ease the whole process and to more efficiently locate specific transactions, different ledgers where used depending on the nature of the transaction. It was also customary to start new ledgers with the passing of each year.
The trial balance is another category further up on top of ledgers. It presents the sum of all transactions and presents each and every account as a debit or as a credit. The sum of all accounts presented within the trial balance should be identical.
Information from the trial balance is then used to generate financial statements. The aim of the financial statements is to present readable and understandable reports across industries which show the financial position of the business and its profitability.
What should I do with accounting records?
The answer to this depends mainly on the country in which your business is situated. Certain rules and laws are sometimes in place which force businesses and self employed individuals to retain all of their accounting records for a number of years.
Besides the country, one also needs to be aware of the different laws within such country. Looking at Maltese requirements from a closer look, one finds out that the Companies Act, Income Tax Management Act and the Value Added Tax laws impose different requirements on businesses.
|Name of Law||Number of years for which accounting records should be stored|
|Companies Act||10 years from the date of the last entry|
|Income Tax Management Act||9 years after the transaction takes place|
|Value Added Tax Act||6 years after the year to which the transaction relates.|
Who needs accounts?
People who require accounting information are seldomly referred to as accounting users. The government, shareholders, employees, lenders, financial institutions such as the Malta Enterprise amongst others are considered to be accounting users. What these users do is analyse and interpret the financial information as presented to make certain determinations.
Lenders such as banks are interested in the books of business to determine whether the business would be able to repay back the loan they are considering to issue. The government is mainly interested in the books of a company to ensure that all of the taxes due to it are being collected. Shareholders need to determine whether their investment is returning suitable return on investment. Employees, would want to have a look at the books of their employer to have peace of mind on their future or if they are receiving shares as part of their remuneration.
Towards a more standardized accounting world
Other users exist and each user would want to utilise and understand the financial statements for their needs. Yet, financial statements and other accounting records would have little to no value if everyone does whatever they want as the financial information cannot be comparable between other businesses at least within the same industry.
For this reason, various global bodies such as the International Accounting Standards Board (IASB) issues and maintains international accounting standards (IFRSs) as an attempt to harmonise reporting, defining transactions and other events with a financial impact.
Who is responsible for Book-keeping and Accounting
While a company might employ full-time or part-time accountants or bookkeepers or alternatively outsource the accounting and bookkeeping function all together to save costs, the directors are ultimately responsible of all the transactions which are taking place in their business. Hence it is extremely important to entrust such as important function as this to individuals and accounting firms of your trust.
At Borg Galea & Associates we strive to abide by some of the most strict ethical guidelines and regulations as presented by the ACCA, the largest globally accepted body of accounting professionals.
We not only incorporated ethical principles such as integrity, objectivity, professional competence, confidentiality and professional behaviour in our code of ethics but we also constantly live up to such codes in everything we do.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.