Accounting process is a series of activities starting from the transaction till the closing of the books. As this process is repeated each reporting period, it is referred to as the accounting cycle. Accounting process must be in a sequence with each step leading to its next step logically. For this to happen, the information must be readable, complete, legible, and every debit entry should have its corresponding credit entry. In the modern accounting process, use of accounting software become a customary to make things easy, but they may not be always accurate hence, it is very essential to follow manual methods. The following are the steps to explain the accounting process.
Identification of economic events
Measurement and recording
1. Identification of economic events
Identification of an economic event helps to determine which transaction to record out of many events. It involves streamlining various activities and select and record those entries that are financially significant. An economic event means, a consequence of a process or a business related activity in an enterprise such as expansion of a unit, buying new machinery, acquiring a new company and purchase of a new business plant etc. Business event can be either external or internal. An external event involves transactions between an external agent and the company such as the purchase of materials from suppliers, payment of bills in the form of phone bills, electricity bills, and monthly rent to the landlord. On the other hand, an internal event is an economic event that occurs entirely between the internal wings of an enterprise, for example, the supply of raw material or components by the store's department to the manufacturing department, payment of wages to the employees, etc.
2. Measurement and recording
Measurement in an accounting process is the estimation of business transactions in the financial terms to put them in a precise monetary unit like rupees, pounds, dollars, etc. If an event is not quantifiable then it is better to write in a way it sounds explanatory however, most of the time, accounting principles doesn't rely upon the entries that doesn't speak numbers. Some of the examples that cannot be quantified include, recruiting a unit head, change of CEO, etc.however, these are not shown in the books of accounts. Recording means once the economic events are finalized and quantified, they must be entered in the books of records in such a way that they are readable, clear, easy to communicate by anyone. Some of the most common books of records for accountants include journal, cashbooks, ledger entry, trial balance, financial statements.
Communication is the most critical measure in which, once the events are identified, measured and recorded in an appropriate order, they must be put in communicative style. The records are so communicated that they are easy to follow, quick, precise but adequate. The communication should be done in such a way that it is designed to pass the right information to the right person at the right time.
An organization refers to a business enterprise of profit or not-for-profit motive. Depending upon the size of activities and level of business operation, it can be a sole-proprietary concern, partnership firm, cooperative society, company, local authority, municipal corporation or any other association of persons. Below is the image showing important steps of the accounting process.