Accounting Process

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, analysing 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 in 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 the part of an accounting process which 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, to correct the errors or to 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 (Frequently Asked Questions)

1. What are the Interim and Annual Financial Statements?

Ans. 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.

2. Define an Accounting Period.

Ans.  An accounting period is a type of established range of time during which the accounting functions are performed, aggregated and analysed including a calendar year or a fiscal year. The accounting period is useful for investment purposes because potential shareholders analyse a company’s performance through its financial statements that are based on a fixed accounting period.

3. What is a Balance Sheet?

Ans.  Balance Sheet is the financial statement of a company which comprises of 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. 

4. What is an Income Statement?

Ans. 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.