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The accounting process begins with the origin of business transactions and is followed by the analysis of such transactions, and is essential for accurately tracking and reporting a business's financial activities. It consists of three major parts:
Recording Business Transactions: Throughout the accounting period, the accountant records each transaction as it occurs. These transactions can involve cash exchanges or credit activities and are documented using source documents like bills, cash memos, and receipts, collectively known as vouchers.
Summarizing Information: At the end of each accounting period, the accountant summarizes the recorded information to prepare the trial balance. This step ensures that the double-entry system has been maintained correctly. Adjusting entries are made to account for any changes that have occurred since the original transactions were recorded.
Reporting and Interpreting: Once the records are complete and up-to-date, the accountant prepares financial statements that reflect the business's financial position and the results of its operations. These financial reports are designed to meet the needs of the users of accounting information, allowing them to judge the success of the accounting process.
For instance, in a familiar shop, the shopkeeper engages in various activities such as selling goods for cash and on credit, collecting payments, paying suppliers, and managing expenses. Not all of these activities involve immediate cash transactions, but those that do are considered business transactions. The accounting process starts with these transactions and involves analyzing them, ultimately leading to the creation of financial reports that provide valuable insights into the business’s performance.
Recording business transactions in accounting involves several key steps to ensure accurate financial records. It begins with identifying the type of transaction that has occurred and gathering all relevant documents such as bills, cash memos, receipts etc.
Following these steps ensures the maintenance of precise and reliable financial records for your business.
Sources Documents and Preparation of Accounting Vouchers: Identify which accounts are affected and how they are impacted, carefully record all transactions and maintain all supporting documents for each transaction.
Record the Transaction in the Journal Voucher: Enter the transaction in the general journal with all necessary details, including:
The date of the transaction
Accounts involved
Amounts to be debited and credited
A brief description of the transaction
Posting to the General Ledger: Transfer the journal entries to the general ledger, where each account has its own record. This process is called posting.
Compile a Trial Balance: At the end of the accounting period, compile a trial balance to ensure that total debits equal total credits. This helps verify the accuracy of the ledger entries.
Adjust the Accounts: Adjust the accounts for items such as accrued expenses, unearned revenues, and depreciation that have not yet been recorded.
Prepare Financial Statements: Use the adjusted trial balance to prepare the financial statements, which typically include the income statement, balance sheet, and cash flow statement.
Close Temporary Accounts: Close out temporary accounts (such as revenues and expenses) to retained earnings to prepare the accounts for the next period.
Understanding every stage of this process is essential for maintaining business transactions in accounting. Each step, from documentary evidence and preparation of vouchers to posting transactions in journals, preparing ledgers, trial balances, and financial statements, is crucial for accurate financial management.
After learning about the process of recording business transactions in accounting, it's essential to understand the accounting system. Check out our next article, "Accounting System and Its Key Components," where we will explore these topics in detail.
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