The accounting process is a series of activities starting from the transaction until the closing of the books. As this process is repeated in 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, and legible. In any books of accounting, every debit entry should have its corresponding credit entry. In the modern accounting process, the use of accounting software is becoming customary to make things easy. However, they may not be always accurate therefore, it is very essential to follow some manual methods in addition to the computer-based methods. The following section takes you through the steps of the accounting process.
Identification of economic events
Measurement and recording events
Communication of data
Organization of data
1. Identification of economic events
identifying what brings in business is important for a firm. Every event is not economical yet, an event can be made economical by properly judging its worth. Identification of an economic event helps to determine which transaction to record out of many events. It involves streamlining the various activities followed by the selection and recording only the financially significant activities. An economic event is a consequence of a process or a business-related activity in an enterprise such as the expansion of a unit, buying new machinery, acquiring a new company and purchase of a new business plant etc. The 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. Events can also be classified as exchange and non-exchange events. Exchange events involves exchange between the 2 parties. The exchange can be money to goods or goods to money depending upon who is selling and who is buying. A non-exchange transaction is the one in which party-A receives something of value from party-B without directly giving value in exchange. Exchange of information, trade secrets, news are all come under this category.
2. Measurement and recording
Measurement in an accounting process is the estimation of business transactions in the financial terms. Proper estimation can help to put things into 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 don't rely upon the entries that don'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. Once the event is ascertained to be measurable, provide the records a systematic means of recording it. The recording should be logical, chronological, systematic, and monetary in nature. Financial information is communicated through accounting reports. The most common reports are called financial statements, which can be observed in books of records for accountants that include a journal, cashbooks, ledger entry, trial balance, financial statements.
3. Communication of data
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 most important advantage of accounting information is to communicate meaningful information, which helps the management to make good decisions. 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.
4. Organization of data
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.