By the time we have understood that accounting is the process of identifying, measuring, recording, classifying, summarizing and analysis of financial transactions. Accounting helps in keeping systematic records to ascertain financial position and financial position of an entity. These records form the fundamentals for the accounting for decision purpose. Transactions and events recorded by suitable account heading and analyzed in terms of debit and credit. And asset becomes to equities and liabilities. Accounts are classified into three categories of accounts
- Personal accounts
- Real accounts
- Nominal accounts
Transactions and events first are journalised, than are posted to ledger and then all accounts are balanced at the end of each accounting period. Balances of nominal accounts are transferred to profit and loss account and balances of real accounts are carried to balance sheet.
The process of accounting reflects how information flows from the source documents up to the stage where final accounts are prepared is as follows:
It represents all documents in the business which contains financial records and act as evidence of the transactions which have taken place. Ex: sale invoices, purchase bills, bank pay-in-slips etc.
Book of original entry
These are books which are used in recording the transactions for the first time. The books are maintained for memo purpose only and will not form part of the double entry system. For ex: purchase book, sales book etc.
These form part of the double entry system and used to record the transactions for the period. These are accounts where information relating to particular asset, liabilities, capital, income and expenditure are recorded. It contains the totals from various ledger accounts and act as a preliminary check on accounts before producing final accounts.
Financial Statements (Final Accounts) are prepared to show the financial position of a business entity. It contains profit and loss account, balance sheet and cash flow statement etc.
All the above mentioned steps of the accounting process have been discussed in detail in the subsequent posts. We shall understand the process with logic.
- Accounting Estimates
- Double Entry System