Question

Q: If you use an end-of-period spreadsheet (work sheet), why do you still have to prepare the financial statements? Isn’t all the information the user needs on the spreadsheet?

Q: Why do we use the income summary account each month to clear out the revenue and expense accounts?

Q: Does anyone make manual entries anymore or even keep a manual set of books?

Answer 1

Solution:

(A). If we use an end of period spreadsheet, still we have to prepare the financial statements to show the exact and net financial position of an entity. However spreadsheet provides the day-to-day transaction records, history and current balance in each accounting system account, throughout the accounting period, the financial statements provides summarised and net information about the results of operations, financial position, and cash flows of an organization. This information is used by the readers of financial statements to make decisions regarding the allocation of resources. At the end of the financial period, spreadsheet serves as the authoritative source of data for building a firm's financial accounting reports.

However spreadsheets keeps records of each transaction the Final records of transactions, financial activities, condition, position of a business, person or other entity is represented in a structured manner and in a formal form which is called Financial Statements. However there are so many types of financial statements, but the main three types of financial statements of an entity, which are used mostly are Income Statement, Balance-Sheets and Cash Flow Statement.

Income Statement: It covers all revenues and expenses of an entity occurred during a specified period. The Net earnings or losses are being calculated by the Income Statement. It provides an overview of entity Indirect Incomes and Gains. Generally it is made on quarterly or yearly basis in a summarised form.

Balance-Sheet: It covers all Assets, Liabilities and stockholder’s equity as a snapshot in time. It is a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period. Assets are listed on the balance sheet in order of liquidity. Liabilities are listed in the order in which they will be paid.

Cash Flow Statement: it is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. Cash Flow Statements shows the movement in the Cash account of an entity. It presents cash inflows (receipts) and outflows (payments) in the three activity of business, i.e. operating, investing and financing.

Hence we can say that spreadsheets and financial statements both are necessary to accomplish the financial position of an entity. Where spreadsheets could be considered as workings and financial statements could be considered as a final report of an entity. Without having financial statements of an entity it is considered as flying blind since financial data from the business could not be reflected by spreadsheets.

(B). Closing the books is an important process in the life cycle of any entity. It is necessary for both reporting and tax purposes and helps management assess the health and well-being of the business.

As we know Assets = Liabilities + Equity + Revenues – Expenses.

At the end of the period, closing entries are used to combine revenues and expenses with the Retained Earnings equity account. The Income Summary account is only used during the year-end closing process -- it facilitates the transfer of balances away from the temporary accounts and into the permanent accounts. We use Income Summary Account each month because it represents the monthly data of the operations. It makes an summarisation and net income/losses over the period for financial reporting, taxation, and internal decision making purposes are derives from the Income Statements.

(C). Manual accounting systems, even in today’s world where computerised accounting systems seem to triumph over paper based systems, can still provide an effective and useful way of of recording business transactions and can deliver an efficient accounting information system for the small business owner. A manual accounts system, if developed correctly can deliver timely and accurate information. In many ways, particularly for the smaller business, in a well designed manual accounting system the advantages outweigh the disadvantages. The manual system, though requires a greater understanding of how to book keep, can be easier to manage, once the key concepts of double entry book keeping have been learnt. The basic book keeping skills needed, once mastered, apply to all the books of account and can be applied to any business, whether you are setting up a manual accounting system for a plumber, website designer or even a book keeping business, the fundamentals are the same.

A disadvantage of a manual accounting system is the likelihood of human error, however those errors manifest themselves. Errors in addition, transposition of figures, incorrect recording of a transaction, incomplete recording of a transaction, - where only one side of the double entry is recorded - are all quite common mistakes and can prove to be quite difficult to locate without a good deal of experience in accounting. Another obvious disadvantage is the likelihood of damage to the records themselves. It might seem an obvious downside, but the records in a paper based accounts system are susceptible to damage by water, fire and other perils. In addition where there exists many transactions to record in a business the sheer volume of transactions can be a disadvantage of a manual accounting system.

However some small entities and individuals keep a manual set of books in their offices still.