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Accounting Process

Accounting process begins with the recording of business transactions with the ultimate objective of preparing two basic financial statements, namely, the income statements and the balance sheet. Income statement, also called, profit and loss account, shows the results of operations of a business entity for a given period of time of profits of loss. The balance sheet shows the financial positions on a particular date.

The steps involved in the accounting process are given as under:

1.    Source documents and transactions analysis:

The details of each business transactions are first entered in source documents. Transactions analysis is then done to determine the economic effect of each transaction on the business entity.

2.    Journalizing transactions:

The recording of economic effects of each business transaction chronologically (date-wise) in the journal – general or special as the case may be – before posting to the ledger. When a set of books is being opened for the first time, the opening balances of each account will be recorded in a journal entry prior to being posted.

3.    Posting transactions:

The transfer of each transaction from the journal(s) to ledger accounts pertaining to persons, property, expenses and gains.

4.    Preparing an unadjusted trial balance:

At the end of each accounting period, a trail balance in extracted from the ledger.

5.    Journalizing and posting adjustments:

As the accounts are prepared on accrual basis, some revenues may be recognized though they were not recorded as transactions during the year. Similarly some expenses may need be adjusted for a proper matching such as outstanding salaries or prepaid insurance and the like. The entries for these items are called adjustments. All adjustments must be journalized and posted before the preparation of the financial statements.

6.    Closing Entries:

The nominal accounts in the trial balance and adjustment entries must be closed by transferring them to income statements or profit & loss account for the correct measurement of income or loss.

7.    Preparation of financial statements:

Income statements an balance sheet and also cash flow statements.

Although the forgoing steps in accounting process are repairing in every accounting period, they do not occur in equal frequency. Analyzing, journalizing and posting take place at regular intervals if not daily; whereas accounts are adjusted and trail balance and financial statement prepared annually.