ACCOUNTING PROCESS

 1.8 ACCOUNTING PROCESS

The accounting process consists of the following four stages.

i) Recording the Transactions 

ii) Classifying the Transactions 

iii) Summarising the Transactions 

iv)  Interperting the Results 

Let us now briefly discuss these stages.

Recording theTransactions: The accounting process begins with recording of all transactions in the book of original entry. This book is called 'Journal'. All transactions are recorded in the Journal in a chronological order (datewise) withsthe help of various vouchers , such as cash memos, cash receipts, invoices, etc.  

ClaSsifying the Transactions: The second stage consists of grouping the transactions of similar nature and posting them to the conccmed accounts in another book called 'Ledger'. For example, all trhsactions related to cash me posted to Cash Account and the transactions related to different persons are entered separately in the account of each person. The objective of classifying the transactions in this manner is to ascertain the combined effect of all transactions of a given period in respect of each account, For this purpose, all accollnts A are balanced periodically. 

Summarising the Transactions: The next step is to prepare a year-end summary known as .'Final Accounts'. But before preparing the final accounts, we prepare a statclient called Trial Balance in order to check the arithmetic4 accuracy of the books of account. If the Trial Balance tallies, itmeans that the transactions have been currently recorded and posted into ledger. Then, with the help of the Trial Balance and some other relevant information we prepare the final accounts. The objectives of preparing the final accounts are (i) to know the net result of business activities, and (ii) to ascertain the financial position of the business. The final account consists of an income statemeqt called 'Trading and Profit land Loss Account' and a position statement called 'Balance Sheet'. The Trading and Profit and Loss Account gives us the information about the am&t of profit made or the loss incurred during the year and the Balwce Sheet shows the position of assets and liabilities of the business as at the end of the year. 

Interpreting the Results: The last stage consists of analysing and interpreting the results dhown by the fin9 accounts. This involvea computation of various accounting ratios to ' 1 assess the liquidity, solvency, and profitability of the business. quch analysis is meant for interested parties like management, investors,bankers, creditors, etc. The balances on ' various accouhts appearing in the Balance Sheet will .then tie trimsfeked to the new books of account for the next year, Thereafter the p.mcess of recording transactions for the next year . . s , star& again.

1.9 LET US SUM UP

In business a number of transactions take place every day. It is not possible to remember all of them. Hence the need to record them. The recording of business transactions in a $ystematic manner is the main function served by accounting. It enables us to ascertain the profit and loss and the financial positions of the business. It also provides the necessary financial information to all interested parties. 

Accounting is the process of identifying, measuring, recording, classifying and summarising 1 the transactions, and analysing, interpreting and communicating the results thereof. The ' accounting system has two stages: (i) Book-keeping, and (ii) Accounting. Book-keeping is mainly concerned with the maintenance of books of account, while accounting is concerned with summarising the recorded data, interpreting the financial results and communicating them to all interested parties. Changes in economic environment and increasing complexity of management have given rise to the specialised branches of accounting such as financial accounting, cost accounting and management accounting, 

The accountants, over a perbd of time, have developed certain guidelines for all accounting ,work. These nre called basic concepts of accounting. Certain concepts are to be observed at Ihe time of recording the transactions, while others are relevant at the summarising and ' =porting stages. The concepts to be observed at the recording stage art: business entity, money measurement, objective evidence, historical record, cost and the dual aspect concepts. 

According to Dual Aspect concept every business transaction involves two asp,ects (if the receiving aspect, and liiJ the giving aspect. Undef 'Double.Entry System' both the aspects must be recorded in books of accoutit. As per rules the receiving aspect igrecorded on the debit side of account affected by transaction and giving aspect on the credit side of the , account affected, For convenience, accounts have been classified into personal, real and I nominal aqcounts and separate rules have been framed for debiting and crediting different classes of accounts. These are called Rules of Debit and Credit. 

The accounting process is divided into four stages: (i) recording the transactions in the books of original entry, (ii) classifying the transactions, (iii) sum~narising the transactions, and (iv) Interpreting the results. 

1.10 KEY WORDS 

Account! A summarised statement of transactions relating to a particular person, thing expense or income,

Accounting Period: A period of twelve months for which the accounts are usually kept. 

Asset: Arlything having an economic value, a ptoperty. 

Balance Sheet: A statement of assets and liabilities as at the end of an accounting period.

Books of Account: Books in the form of bound registers or loose sheets wherein transactibns ire recorded. 

Business: Any activity carried on with profit motive. 

Bualnas Unit: A unit fotmed for the purpose of carrying on some kind of business activity.

Capltel: Owner's investment and equity in the business.

Company An association of persons registered under the Companies Act.

Credit: It represents the giving aspect of a transaction

Creditor: A to whom the business owcs. 

Debit: It represents the receiving aspect of a transaction. 

Debtor! A peraon owing to the,business.

Expmdlture: Spending of money or incurring a liability for some benefit, service or asset received by the business.  

Expense: An expenditure incurred for some benefit or service. 

Equity: A claim or right over the business. It includes both the owners' and creditits' ,  claims. 

Financial Position: Position of assets and liabilities of a business at a given point of time

Financial Statement: Summary of accounting informatioh'such as Profit and Loss Account and Balance Sheet prepared at the end of an accounting period. These are also called Final Accounts.

Income: Amount earned through business operations. 

Liability: Amount owed by the business to outsiders. 

Nominal Accounts: Accounts relating to incomes and expenses. 

Partnership Firm: A business unit owned by two or more persons who have agreed to 

share the profits of the business carried on by all or any of them acting for all. 

Personal Accounts: Accounts relating to persons, firms and institutions. 

Profit: Excess of income over expenses during a given period. 

Profit and Loss Account: An account showing profit or loss of the business during an accounting period. 

Real Accounts: Accounts relating to the properties of business. 

Sole Proprietorsliip: A business unit owned by one person. 

Transaction: Transfer of money or money's worth between the two business units. 

1.11 SOME USEFUL BOOKS 

1        Harold Bierman Jr. and Allan R. Drebin, 1978: Firzancial Accounting, An Introduction, W.B. Saunders Company, Philadelphion, London. (Chapters 1-3) 

2         Maheshwari, S.N., 1986. Introduction to Accounting, Vikas Publishing House: New Delhi. (Chapters 1, 2) 

3         Patil, V,A. and J.S. Korlahalli, 1986. Principles and Practice ofAccounting, R. Chand & Co., New Delhi. (Chapters 1-3) 

4         Gupta, R.L. and M. Radhaswarny, 1986. Advanced Accountancy, Sultan Chand & Sons: New Delhi. (Chapter l,2)