The Accounting Process
In the beginning of the accounting process, a business entity must identify the monetary and financial transactions that take place within its company. These transactions are recorded. Typically, only business transactions are recorded, not the transactions of the owner. The next step is the posting of journal entries to the general ledger. This is done automatically if the business uses accounting software. However, some companies do not use accounting software at all. That is okay. There are other ways to post journal entries as well.
In the past, the first three stages of the accounting process were performed by hand. This meant that journal entries were manually entered and postings were made periodically, if at all. Today, computer-based accounting systems have made the first three stages of the process continuous. Software automatically captures journal entries and posts them to the ledger, making the entire process automatic. The third step involves the creation of a trial balance from the ledger entries. Exhibit 5 shows how the trial balance is created between ledger posting and financial statement reporting.
The accounting process begins with the identification of business transactions. The next step is the analysis of economic events that have affected the business. While businesses engage in many different transactions, not all of these transactions are included in the accounting cycle. Quantifiable transactions are those that have a monetary value and are recorded in the currency used by the business. This allows for comparative analysis and commonality of financial data. With proper accounting procedures, errors are avoided and results are improved.
Sound accounting systems also help companies build a positive reputation. The company will look more appealing to investors and other external parties, as well as the general public. A solid accounting system also helps a company avoid fraud. Whether a business needs funding, it needs to provide transparent financial reports. A sound accounting system helps it improve its credit score. It also makes the accounting process easier for employees. So, it’s crucial for a company to implement accounting software in its business.
The financial statements of a business are the final outputs of the accounting process and cycle. Typically, a company produces five financial statements. The Statement of Financial Position (SFO) is the most commonly used and comprehensive of the five. It should equal the total of the company’s Assets, Liabilities, and Equity. This statement helps companies to determine how much money they should spend. The Income Statement and Balance Sheet are used by investors to analyze the business.
The fourth step of the accounting cycle involves the calculation of the trial balance. This statement tells the company how much money it has available in all its accounts. This balance is carried forward to the fifth step for testing purposes. It is used to check that the debits and credits balances are equal. Afterwards, a worksheet is created to analyze the data and determine whether adjusting entries should be made. Once these two steps have been completed, the final product is the financial statement.
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