STAGES INTHE ACCOUNTING PROCESS

✍️The eight steps to the accounting process include the following:

Step 1: Identify Transactions

The first step in the accounting cycle is identifying transactions. Companies will have many transactions throughout the accounting cycle. Each one needs to be properly recorded on the company’s books.

Record keeping is essential for recording all types of transactions. Many companies will use point of sale technology linked with their books to record sales transactions. Beyond sales, there are also expenses that can come in many varieties.

Step 2: Record Transactions in a Journal

The second step in the cycle is the creation of journal entries for each transaction. Point of sale technology can help to combine Steps 1 and 2, but companies must also track their expenses. The choice between accrual and cash accounting will dictate when transactions are officially recorded. Keep in mind, accrual accounting requires the matching of revenues with expenses so both must be booked at the time of sale.

Cash accounting requires transactions to be recorded when cash is either received or paid. Double-entry bookkeeping calls for recording two entries with each transaction in order to manage a thoroughly developed balance sheet along with an income statement and cash flow statement.

With double-entry accounting, each transaction has a debit and a credit equal to each other. Single-entry accounting is comparable to managing a checkbook. It gives a report of balances but does not require multiple entries.

Step 3: Posting

Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account. This allows a bookkeeper to monitor financial positions and statuses by account. One of the most commonly referenced accounts in the general ledger is the cash account which details how much cash is available.

Step 4: Unadjusted Trial Balance 

At the end of the accounting period, a trial balance is calculated as the fourth step in the accounting cycle. A trial balance tells the company its unadjusted balances in each account. The unadjusted trial balance is then carried forward to the fifth step for testing and analysis.

 

Step 5: Worksheet

Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made.

In addition to identifying any errors, adjusting entries may be needed for revenue and expense matching when using accrual accounting.

 

Step 6: Adjusting Journal Entries

In the sixth step, a bookkeeper makes adjustments. Adjustments are recorded as journal entries where necessary.

 

Step 7: Financial Statements

After the company makes all adjusting entries, it then generates its financial statements in the seventh step. For most companies, these statements will include an income statement, balance sheet, and cash flow statement.

 

Step 8: Closing the Books

Finally, a company ends the accounting cycle in the eighth step by closing its books at the end of the day on the specified closing date. The closing statements provide a report for analysis of performance over the period.

After closing, the accounting cycle starts over again from the beginning with a new reporting period. At closing is usually a good time to file paperwork, plan for the next reporting period, and review a calendar of future events and tasks.

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USERS OF ACCOUNTING INFORMATION

✍️There are two types of users of accounting information and they are:

(a)  Internal users

(b) External users.

Let us discuss the above in details.

(a) Internal users of accounting information

1.      Managers: Managers need accounting information to know the growth of the organization, to compare another budget with the actual result, to evaluate their performance etc.

2.      Finance Directors: Finance director needs accounting information to know the financial condition of the organization, to collect funds and effective and efficient italicization of that fund. He makes the investment decisions.

3.      Company officers: Then need accounting information to do everyday work to achieve the goals of the organization.

4.      Production supervisors: Then needs accounting information to know the growth of production to compare the budget with the actual result to evaluate their performance etc.

5.      Employees: Employees of the organization required to know the accounting information for the evaluation of the outcome of the organization and for the appraisal of their performance during the year. 

(b) External users of accounting information

1.      Investors: Every investor might use accounting information regarding that business.

2.      Creditors: Creditors (Such as suppliers, banker, NGOs, cooperative societies and other financial institution) use accounting information to evaluation the risk of granting credit or lending fund.

3.      Tax authority: Tax authority uses accounting information to the complex tax liability of the respective organization.

4.      Regulatory agency:  Regulatory agency monitor whether the companies organization are operation within prescribed rules

5.      Labour unions: Labour unions want to know whether the owner can pay increased wages and benefit to the employees of the organization.

6.       Customers: Customers are   interested in whether a company will continue to honor product warranties and extended its product lines.

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NATURE AND FUNCTIONS OF ACCOUNTING

DEFINITIONS OF ACCOUNTING

✍️Accounting refers to the mechanism of maintaining and keeping the records of the transactions and events and also its analysis and interpretation. It also includes the preparation of final accounts i.e. Trading , Profit or Loss Account and Balance Sheet (now Statement of Financial Position or Condition) at the end of the financial year. It is associated with communicating the interpreted results of the financial information to its users.

According to AICPA (American Institute of Certified Public Accountants)

“Accounting is art of recording, classifying, summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof.”

According to AAA (American Accounting Association)

“Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of information.” 

According to APB (Accounting Principles Board)

“It is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”

According to RN Anthony

“Accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms the information of business.”

According to Bierman and Derbin

“It may be defined as the identifying, measuring, recording and communicating of financial information.”

According to Smith and Ashburne

“Accounting is the science of recording and classifying business transactions and events, primarily of financial character, and the art of making significant summaries, analysis and interpretation of those transactions and events and communicating the results to the persons who must make decisions to form judgments.”

Thus, Accounting is a system which involves the identification of transactions and events which are financial in nature; ensuring measurement of transactions in the monetary terms; recording the transactions in the journal; classifying the entries in ledger; summarizing the entries in final accounts i.e. Trading Account, Profit or Loss Account and Balance Sheet now Statement of Financial Position or Condition; analyzing and interpreting the results and communicating the results to the users of the information of accounts. “

Having shed light on the definitions of accounting, let us look at the nature of accounting in details.

NATURE OF ACCOUNTING

There are two attributes that describe the nature of accounting. Namely:

(a) Qualitative Attributives of Accounting

(b) Quantitative Attributives of Accounting 

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FUNCTIONS OF ACCOUNTING

Having shed light on the nature of accounting, let us look at the functions of accounting.

Yorston, Smyth, and Brown have divided functions of Accounting in two groups:

a. Historical or Stewardship functions of Accounting

b. Managerial Functions of Accounting

Let us put more light on the above functions mentioned by Yorston, Smyth, and Brown as it will be discussed in details.

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