Accounting Process

Every company has an accounts department that looks after the accounting details of the company. An accounting department is the backbone of every business. It records all the business transactions and keeps a track of the incomes and expenses of the business. The business depends on these incomes for its profits and should know all the expenses that are incurred to keep it going. They also determine the correct financial position and financial standing of the business. All this makes the recording of transactions important. For the systematic and accurate recording of the transactions, accounting is important. Let us understand the accounting process in detail.

The purpose of accounting is recording all the transactions honestly and accurately in the books of accounts. The accounting process can be defined as "the process that begins when the transaction takes place and ends when the transaction is recorded in the books of accounts". It is a series of procedures that are used to analyze and record the business transactions for a particular period of time.

The accounting process, also known as the accounting cycle process, includes the steps mentioned below. In order to follow these steps, you will need to know all the accounting principles and concepts well.

• The first step involves identifying the transaction and finding the source documents of the transaction.
• Analyze which accounts is the transaction affecting and what is the amount of the transaction.
• Record the entry into the journal as a credit or debit, according to its nature.
• Transfer the journal entries into the appropriate accounts in the ledger.
• A trial balance is then created which sees to it that the debit amount equals the credit amounts.
• Correct the discrepancies in the trial balance and balance the debit side with the credit side.
• Make adjusting entries in order to record the accrued and deferred amounts.
• Next, prepare the adjusted trial balance on the basis of the deferred amounts.
• Prepare the financial statements like the income statements, the balance sheet, retained earnings statements and finally the cash flow statements.
• Close the temporary accounts like revenues, expenses, gains, etc. by closing journal entries. These accounts are transferred to the income summary account and later posted into the capital accounts.
• Prepare the final trial balance on the basis of the closing journal entries.

There can be a slight alteration to the above. The financial statements can be made before the adjusting entries. Also, some companies add another step after the final trial balance. This step is called reversing entries step. Reversing entries is done if an accrual or deferral entry was recorded earlier and needs to be adjusted to avoid a double entry. It is recorded on the first day of a new recording period. All the accountants follow the same sequence, except for the reversing entries. That is an optional step which may or may not be followed.

The process of accounting is framed based on the basic accounting concepts and principles followed in the business world. Those who understand the importance of accounting follow these processes accurately.