Accounting Process

What is the Accounting Process?

Accounting or accountancy is significant to understand for anyone who owns a business or seeking a career in commerce-related fields. Accountancy is of crucial importance in commerce as it deals with measuring, processing, and analyzing financial information in a firm. It is rightly called the "language of business." 

This crucial field has several subfields that deal with various aspects of the finances of a company.

Accountancy is an important subject for all commerce students.  Students may find a few topics from accountancy difficult to comprehend as they are new to the subject and still getting a hang of it. Students may get overwhelmed by the amount of information that they need to learn and process to excel in the subject. Therefore, Vedantu brings you all the information you need to know about the accounting process. You will also read about different types of accounting processes and their workings.   

So if you are someone who is desiring to understand the basics of accounting processes or a student who wishes to understand various aspects of accountancy, then this article is for you.

Vedantu's expert accounts professionals have gathered all the important information regarding the process of accounting and summed it up in an easy-to-understand manner for its readers.

History of Accounting

Accountancy is not a new field that has been recently developed. This subject has been used in its most basic form since ancient civilizations. Research shows that the first forms of accounting can be traced to the Mesopotamian civilization. Egyptians and Babylonians are said to be the first ones to develop auditing systems. Also, research in the earliest Roman Empire reveals that the Roman Government had access to detailed financial information.

Talking about India, it is well known that during the Mauryan Empire, Chanakya wrote a manuscript that was quite similar to a financial management book. Chanakya has also been credited to write a book named "Arthashastra" that contains detailed accounts of bookkeeping for a state.

In addition to these, one can easily find that all the earliest forms of civilization developed some form of accounting techniques to maintain records and go over their finances.

Therefore it can be safely said that the modern professional accounting that we see today is a product of the evolution of centuries-old traditions, needs, and thought about managing finances.


What is the Accounting Process?

Accounting is a process that helps in recording the financial transactions which are necessary for the business. This process includes summarizing, analyzing and reporting the transactions to give an overview to the agencies, regulators and tax collection entities. The financial statements that are used in accounting are in a concise summary format. Financial transactions which occurred over an accounting period summarizes the company's operations, the financial position and also the cash flows.

How Accounting Works?

Accounting is one of the most prior functions for almost any kind of business which may be handled by a bookkeeper or by an accountant at a small firm, or even by a sizable finance department with a dozen of employees at larger companies. The reports that are generated by various streams of accounting like cost accounting and managerial accounting are invaluable in helping the management to make an informed business decision. 

Types of Accounting

Financial Accounting

This accounting refers to the processes that are used to estimate the interim and annual financial statements. These results in all the financial transactions which occur during the accounting period. They are summarized into a balance sheet, an income statement, and a cash flow statement.

Managerial Accounting 

Managerial Accounting uses the same data as financial accounting. In managerial accounting, an accountant generally generates monthly and also the quarterly reports that a business's management team can implement the same to devise decisions about how the business should operate 

Cost Accounting

Cost accounting helps the business to make decisions about costing. More importantly, cost accounting considers all of the costs related to producing a product

Accounting Process Steps

The accounting is processed into three separate types of transactions which were used to record the business transactions. The information is then recorded into financial statements. The transactions are:

  1. The First Step: to ensure that the entries are reversed from the previous period.

  2. The Second Step: comprises the steps which are needed to record the individual business transactions in the accounting records.

  3. The Third Step: is the period-end processing that is required to close the books and produce the financial statements.

First Step

Is to verify that all the transactions are designated as reversing entries in the preceding periods which have actually been reversed. Doing this will ensure that the transactions are not recorded twice in the same period. These transactions are generally tagged as being the reversing entries in the accounting software.

Second Step

The second step consists of further four steps:

  1. Identifying the transaction. 

  2. Preparing the document. 

  3. Identifying the accounts.

  4. Recording the transaction

The above-mentioned four steps are part of an accounting process that is used to record the individual business transactions in the accounting records.

Third Step

In this last step, the final recording is done:

  1. Prepare Trial Balance - The trial balance lists the balance left in all the accounts. The total of all the debit in the trial balance equals the total of all the credit, while in contrast to this, there is an error in the entry of the original transactions which must be researched and corrected.

  2. Adjust the Trial Balance - This may be required to adjust the trial balance, correct the errors or create the allowances.

  3. Prepare an Adjusted Trial Balance - This is an original trial balance, plus or minus and other such adjustments are to be subsequently made.

  4. Prepare Financial Statements - The financial statements are then adjusted from the trial balance. The asset, liability, and shareholders' equity items are recorded in the balance sheet. 

  5. Close the Period - For closing the period, the shifting of the balances is done in the revenue and expense accounts into the retained earning account.

FAQs on Accounting Process

1. What are the Interim and Annual Financial Statements?

The interim statement is a type of financial report which covers a period of less than one year. Annual statements are not audited. Interim statements increase the scope of communication between the companies and the public and provide investors with up-to-date information between the annual reporting periods.

Financial Statements are an important concept in accounting. They help in revealing the exact position of a company. There are several important concepts associated with Financial Statements that are crucial. You can find more information on the Financial Statements of a Company on Vedantu's website.

2. Define an Accounting Period.

An accounting period is a type of established range of time during which the accounting functions are performed, aggregated and analyzed including a calendar year or a fiscal year. This period can also be a week, month, or quarter, etc. The accounting period is useful for investment purposes because potential shareholders analyze a company’s performance through its financial statements that are based on a fixed accounting period. This helps in regular and consistent reporting and also leads to proper analysis of the financial statements of a company.

3. What is a Balance Sheet?

A Balance Sheet is the financial statement of a company that comprises assets, liabilities, equity capital, total debt, etc. at a point in time. The balance sheet includes assets on one side and liabilities on the other side. The balance sheet plays a crucial role in giving any interested party a proper idea about the current financial position of a company. One can understand what the company owns and what its debt is through a balance sheet. It is helpful for investors to decide if they want to invest in a particular company. 

4. What is an Income Statement?

The income statement focuses on four key terms—revenue, expenses, gains, and losses. This statement does not differentiate between cash and non-cash receipts. This does not also differentiate between the cash versus the non-cash payments/disbursements, purchases in cash versus purchases on credit. An income statement helps analyze whether the company is producing enough profit to pay all of its liabilities. Income sheets, balance sheets, and statements of cash flows form crucial components of the financial statement of a company. 

5. How can Vedantu help someone to understand accounting easily?

Vedantu provides easy-to-understand information about various important topics in accounting including Final Statements of a company, Income, and Expenditure Account, Final Accounts, Bookkeeping, Accounting Ratios, etc. The experts of Vedantu have collected important yet straightforward information on a wide variety of accounting topics on its Commerce page for students to easily understand such topics. Moreover, Vedantu offers an array of study material for students who are studying accounting as a subject in schools. These include textbook solutions, revision notes, important questions, sample papers, and previous year question papers. All of these are available to be accessed for free. Thus, with Vedantu students can understand every aspect of the accounting process easily.