Accounting Process

Accounting Process

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Accounting process includes all event from analyzing some events until interpreting financial report.

1. Analyzing

Looking at events that have taken place and thinking about how they affect the business. We have to distinguish whether a transaction is financially affecting firms asset, liability, and owner’s capital in a firm or not. Non financial/economic events such as blooming flower in the firm’s garden, replacing old employer with new one, a meeting with the team, etc are different with financial/economic events such as expenses to take care the flower, expenses on hiring new employer, and expenses for snack for the office meeting. This events must be followed by evidences or proofs, such as bill, receipts, or other proofs.

2. Recording

Entering financial information about events into the accounting system. For instance, a customer buys our product. Then we must record this transaction as Sales/Revenue (Credit) and record as Cash (Debit) if customer gives us money, or record as Account Receivable (Debit) if they don’t give money to us. Along with this event is a decreasing inventory because it is already transferred from our store/warehouse to customer. The we record this decreasing asset of inventory as Inventory (Credit) and Cost of Goods Sold (Debit). The transactions are recorded in a journal.

3. Classifying

Sorting and grouping similar items together. Similar event must be treated similarly. For example, selling to Mr. A must be treated similarly with selling to Mr. B although they have different Dollar on transaction. If we record a selling of a pen to Mr. A as an account which has a name of “Revenue”, then we must treat consistently a selling of a pen to Mr. B with the same account “Revenue” not other accounts like “Income”, “Earning”, etc.. A group of similar items together forms a ledger.

4. Summarizing

Bringing the various items of information together to determine a result. The ending balance of all ledger is brought to one place called Trial Balance.

5. Reporting

Telling the result. Accounting reports, called financial statements, provide summarized information to the owner such as:

Income statement—A summary of the revenue and expenses for a specific period of time.
Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time.
Balance sheet/Statement of Financial Position—A list of the assets, liabilities, and owner’s equity as of a specific date.
Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

Notes to Financial Statement — the details and additional information that are left out from the four financial statements above

6. Interpreting

Deciding the meaning and importance of the information in various reports. It usually uses tools for financial analysis and interpretation such as:

Ratio of liabilities to owner’s equity = Total Liabilities : Total owner’s equity

Return on Assets (ROA) = Net Income : Total Assets

Etc.

References:

“Accounting Principles” – Phillip E. Fess and Carl S. Warren

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