Accounting process
| Accounting process |
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The accounting process is a cyclical activity which is using by all business companies to monitoring their business operations
This process is divided into[1]:
- The Recording Phase - in this part of the process involves using bookkeeping.
- The Summarizing Phase - all recorded financial transactions are summarized in a correct form and presented as financial statements.
- The Clearing or Preparatory Phase - in this step, all documents must be closed and summarized to continue activity and open a new accounting period
Accounting process consists of three stages: beginning a new period, accounting individual transactions and closing a period.
Accounting process: Beginning a new period
In order to begin new period it is necessary to all reversing entries from previous period have been reversed. That prevent doubled recording of transactions. The reversal should be done automatically by accounting system, but it should be checked.
Accounting process: Individual transactions
During the accounting period each transaction should be:
- identified - what kind of transaction it is?
- prepared - usually some documents will be necessary (invoice, report, etc.)
- categorized - find proper account to record transaction
- recorded - enter the transaction into the accounting system.
Accounting process: Closing a period
There are several steps to be made:
- prepare and then adjust trial balance,
- prepare financial statements,
- close the period,
- prepare a post-period trial balance.
Most of those operations should be done automatically by the accounting system. However, accountant should know how that works in order to detect errors.
Accounting
Accounting is a system of preparing and processing financial records. This is a process of measuring, communicating and interpreting financial documents. The process is used during making a household budget and meanwhile controlling for big companies. Accounting is a service to provide financial information about economic entities - which are useful in making decisions.
Bookkeeping - this process depends on registration of business transactions in accounting books. During this process, information is collected and processed. Accounting is a more complex process than bookkeeping[2].
Financial statements
We can distinguish the three most important financial statements[3]:
- The balance sheet - in this document, information about assets and liabilities are included.
- The income statement - this document shows the amount of income earned and expenses incurred in some period of time. These statements help to evaluate result from our activity.
- The Statement of changes in financial position - this document involves information about the sources and uses of funds.
Preparing Financial Statements:
At the end of the reporting period and closing all accounts - it's time to prepare financial statements. Documents can be prepared directly from the data in accounting books. The data must be organized and presented in a simple and clear way. The process of preparing financial statements[4]:
- Identify all revenues and expenses.
- Compute net income.
- Compute the ending retained earnings balance.
- Prepare a balance sheet.
Business transactions
Business transactions is an activity, action or event characterized by an exchange of values between two partiers. They are the raw materials included in the accounting process and located in the financial statements. Only these transactions are considered as accounting, which are expressed in cash[5].
Users of accounting information
Financial information is needed for various users about the financial condition potential company. Commonly users of accounting information[6]:
- owners - they need information about the amount of return is earned from invested capital.
- management - they must know how efficient they have been in using resources.
- bank or creditors - they must set the ability of borrowers to pay.
- government - they must set compliance by the business of tax and requirements.
- other users - potential investors, consumers
Accounting as the language of business
Information from the [[]] department is very important for society and business. Accounting provides the necessary information to make a decision for a company. Accounting depends on management financial records and is specialized in communication. Very often accounting is called the "language of business". The financial documents - answer for such questions about[7]:
- selling, costs, and expenses, profit or loss, investment
References
- Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board characteristics, accounting report integrity, and the cost of debt. Journal of accounting and economics, 37(3), 315-342.
- Pefianco, E.C., Mercado, E.C. (2005). The Accounting Process, Goodwill Trading Co.
- Garcia, P.C., Mojar, B.Q., Gemanil, B.A. (2006).Basic Accounting Concepts & Procedures, Rex Bookstore.
- Stice, E.K., Stice, J.D. (2011).Intermediate Accounting, Cengage Learning.
Footnotes
Author: Anna Klisiewicz
