Accounting process is the procedure that is followed by entity for recording the business transactions in the books of accounts so that the position of each account balances can be known and the profitability and financial position of a business can be measured. The steps include identifying, classifying, recording and summarizing of the financial business transactions.
The Accounting process of a business includes steps to record every financial transaction of the business and at the end, preparing the financial statements to know the profitability and the financial position of the business after regular intervals. In companies having large scale business, separate professionals are hired for doing the process of accounting and even the separate accounting software are purchased to record the transactions as it becomes difficult to manually enter the transactions on papers.
Steps in Accounting Process
The steps of accounting process are:
1.Identifying the transaction:
The first step of the accounting process is identifying the transactions that are to be recorded in the financial records. The transaction that can be measured in terms of money are only recorded and the transactions that are related to the business are only to be entered not the ones that are related to the owners of the business.
2. Recording transactions in journal:
After the identification of the transactions that are to be recorded, the next step is to do the journal entries based on the policy followed by the business. In dual accounting system, every transaction affects at least two accounts where the one is debited and the other one is credited and for every transaction, the total of debits is equal to the total of credits. In cash basis of accounting, the transactions are recorded when the cash is received/paid whereas in case of accrual basis of accounting, the revenues and expenses are recorded when they are received and incurred respectively.
3. Ledger Posting:
After the transactions are entered into the journal books, the accounts are individually posted into the general ledger so that the business owner can know the existing balances of each account. For example all the transactions that involve cash are transferred to the cash ledger which shows every transaction that has effect on the cash balance of the business and at the end of the accounting period the ending cash balance can be known.
4. Un-adjusted trial balance:
The preparation of trial balance is the next step. After the trial balance is prepared the total of all debits should be matched with the total of all credits. The purpose of trial balance is to summarize the transaction and identify the errors in posting by matching the total of debits and credits.
5. Adjusting journal entries:
Adjusting entries are those entries that are made at the end of the year for booking the expenses that are incurred but not recorded and the income that is earned but not yet entered in the books of accounts such as interest income on fixed deposits which is earned every year but the amount is received after the completion of the tenure of fixed deposit.
6. Adjusted trial balance:
After the above process again the trial balance is to be prepared taking the above entries into consideration and then again checking that the total of all credits are equal to the total of all credits..
7. Preparation of financial statements:
Then comes the final step before the closing entries are made. This step involves presenting and preparing the financial statements of the company to measure the final profitability and the financial performance of the business that includes preparation of income statement, balance sheet and the cash flow statement.
8. Closing entries:
Finally the whole accounting cycle comes to an end with this step. These entries are done to transfer the balances of temporary account to permanent account. The temporary accounts are those accounts of business whose balances ends in a single accounting year such as expenses of the business, revenue and purchases etc. these balances are transferred in the income statement of current year and then to permanent account i.e. profit/loss of the year is transferred to retained earnings.
After the all steps are done, some organizations again prepare trial balance to tally the total of debits and credits and with this accounting cycle starts again with the start of another accounting year.
Thus, the step of accounting process are the series of steps that involves recording, classifying, summarizing of business financial transactions etc. this process starts with identification of the transaction and ends with the preparation of financial statements to evaluate the financial performance of the business.