Accounting Process

Although there are a lot of automated software programmed to make things easy in accounting, a definite process is a must. Accounting follows a certain sequence, with each step interdependent on the rest. The following are the steps to explain the accounting process.

  1. Identification of economic events

  2. Identification, Measurement, Recording, and Communication

  3. Organization

  4. Interested Users of Information

 

1. Identification of economic events: Identification means to determine which transaction to record. It involves streamlining various activities and select only those of financial significance and record them in the books of accounts. Some of the steps under-identification are:

  1. It’s a consequence or a happening to an enterprise. For example, the Expansion of a unit, buying new machinery, acquiring a new company, purchase machinery.

  2. If this event involves transactions between an external agent and the company then it is an external event. The external events can be the purchase of materials from suppliers, Payment of bills in the form of phone bills, electricity bills, and monthly rent to the landlord.

  3. On the other hand, an internal event is an economic event that occurs entirely between the internal wings of an enterprise, e.g., supply of raw material or components by the store's department to the manufacturing department, payment of wages to the employees, etc.

 

2. Measurement, Recording, and Communication

Measurement is the estimation of business transactions into financial terms by using the monetary units, like rupees, pounds, dollars, etc. If an event is not quantifiable then it is not considered for recording in financial accounts. Some of the examples that cannot be quantified include, recruiting a unit head, change of CEO, etc. which are not shown in the books of accounts. Recording means once the economic events are finalized and quantified in specific units, these are recorded in books of account in a systematic order as follows. The common books of records for accountants include journal, cashbooks, ledger entry, trial balance, financial statements.

 

3. Communication: This is the most important step in which, once the events are identified, measured and recorded in an appropriate order then the information should be passed on to management and other internal and external users. The communication should be easy, quick, regular, and professional. 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.

 

4. Organization refers to a business enterprise, whether for 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.

Accounting process



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