By the time we have understood that accounting is identifying, measuring, recording, classifying, summarising, and analysing financial transactions.
Accounting helps keep systematic records to ascertain the financial position and financial position of an entity. These records form the fundamentals of accounting for decision purposes.
Transactions and events are recorded by suitable account heading and analysed regarding debit and credit. And asset becomes equities and liabilities. Accounts are classified into three categories of accounts.
- Personal accounts
- Real accounts
- Nominal accounts
Transactions and events first are journalised, which are posted to the ledger and then all accounts are balanced at the end of each accounting period. Balances of nominal accounts are transferred to profit and loss accounts, and balances of real accounts are carried to the balance sheet.
The process of accounting reflects how information flows from the source documents up to the stage where final accounts are prepared as follows:
It represents all documents in the business which contain 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 [Journal]
These are books used to record the transactions for the first time. The books are maintained for memo purposes only and will not form part of the double-entry system. For example purchase book, sales book etc.
These form part of the double-entry system and are used to record the transactions for the period. These are accounts where information relating to particular assets, liabilities, capital, income and expenditure are recorded. It contains the totals from various ledger accounts and acts 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 a profit and loss account, balance sheet, cash flow statement, etc.
All the steps mentioned earlier in the accounting process have been discussed in detail in the subsequent posts. We shall understand the process with logic.