Accounting is the methodical process of identifying, measuring, recording, classifying, summarizing, and understanding financial information, and communicating the results by way of the preparation of financial statements.
Accounting helps in the decision-making actions of management. It is beneficial in pursuing the performance and development of a business. Without accounting, there would be no way for the business to have calculated and impartial data on the state that the business is currently in. Fraud prevention is also made possible by the performance of the accounting process. Depending on the type of the company, the procedures and kinds of transactions involved, there may be numerous steps that will be tracked by a company in its accounting cycle.
The initial process of the accounting cycle is the documentation and check of business communications and monetary actions.
- Documentation and inspection of these communications start from documents, such as bills, official receipts and other financial documents.
- Transactions are recorded in the journal in consecutive order, as they happen. Transactions are entered using the “double-entry bookkeeping system”, one account is debited while the other is credited.
- Journalized transactions are applied in their account records, displaying increases, decreases, and the present ending balances.
- The ending balances of the balance sheet in the record are removed and placed in one fiscal report, which is the unadjusted trial balance. Step 5 To see the accrual foundation of bookkeeping, adjusting entries must be prepared.
- Adjusted Trial Balance will additionally let the evaluation of precision, to see whether the debits will still equal the credits after the adjustments have been incorporated.
- There are five financial reports that are arranged and will make up the financial reports of the company: Balance sheet, income sheet, statement of changes in equity, statement of cash flow, and notes to financial statements.
- Closing entries are vital because the business will once again start on a clean slate.
- The Post-Closing Trial Balance will then be arranged to once again test precision and confirm that the debits and credits are still equal.
- To keep reliability of the accounting process and confirm a smooth changeover into the next accounting cycle, there needs to be a reverse to the adjusting entries that were arranged to conform with the accumulation practice of accounting. There are five financial reports that are prepared and will make up the financial reports of the company.
Balances sheets contain three components: assets, liabilities, and equities. Income statements show income earned by the company. Statement of change in equity is a details report of the equity part of the balance sheet. Statement of cash flow shows the movement of money to and from the company, items such as cash receipts and disbursements are shown here. Notes to financial statements contains notes and disclosures about items in the financial statements. A company’s financial statements offers numerous financial evidence that investors, creditors and analysts use to gage a company’s financial performance.
Financial reporting serves two primary purposes. First, it helps organizations to participate in effective decision-making regarding the company’s purposes and overall plans. The data revealed in the reports can help management distinguish the strengths and weaknesses of the company, as well as its overall financial well-being. Second, financial reporting offers vital information about the financial health and actions of the company to its stakeholders including its shareholders, potential investors, consumers, and government regulators. It’s a means of confirming that the company is being run properly.
Accounting is referred to as “the language of business” because it communicates the financial condition and performance of a business. We can use this to communicate financial transactions and their results. Accounting is a comprehensive system to collect, analyze, and communicate financial information. With the help of accounting process, we can determine the profit or loss of the business on a specific date. It also helps us scrutinize the past performance and strategize future action.
Accounting and Financial Management are vital management functions in every enterprise. Whether you manage a small department, a major division, big company, or small company you work with numbers every day.
