Accounting and It’s uses in business decisions - Accounting - Lecture No- 01

Subject: Accounting 
Topic: Accounting and It’s uses in business decisions 
Subject Code: HUM 4302
Teacher Name: SM Shahidul Islam

Download Link 
and The Recording Process 

What is Accounting??? 

•Accounting is the systematic recording, reporting and analysis of financial transaction of a business.

•The person who carries out the above-mentioned tasks is known as accountant.

•Accounting is also known as the language of Business.    

Who uses accounting to make business decisions?

The recording processes of accounting

Financial information is presented in reports called financial statements. But before they can be prepared, accountants need to gather information about business transactions, record and collate them to come up with the values to be presented in the reports. Below is a diagram illustrating the recording processes of accounting.

·    Identifying and analyzing transaction and events:Every accounting process of a transaction starts with identifying and analyzing. Under this process, all the important transactions that pertain to a business entity are recorded. Every transaction is identified as to relate to a business entity. After the identification of the transaction, the process of analyzing it starts. The process of analyzing involves the determination of the accounts affected and also the accounts that are to be recorded. This step thus includes the preparation of business documents. The document so prepared serves as the basis of a business transaction.

Recording in the journal: A journal is simply a book, either a paper or electronic, in which all the transactions are recorded. After the identification and analyzing process, the transaction goes through the process o recording it in a journal. These transactions are recorded in a journal, using a double entry bookkeeping system. The transactions in a journal are always  

 

·         recorded in chronological order, the journals are, therefore, also known as ‘Books of original entry.

·         Posting to the ledger: Posting the transaction into a ledger further follows the second step. A ledger is nothing but a collection of accounts that present the changes made in each account, as a result, of past transactions and their existing balances. The ledgers are also known as the “Books, of final entry.’ This is the most important step in the recording process of the transaction. After the posting is done, the balances of each account start to be determined.

·         Unadjusted trial balance: All the balances obtained, as a result, of ledger are further arranged in one report. All the debit balances are further added in it. Along with the debit balances, the credit balances too are added. The balance of the debits and the credits must be equal. However, if any error is discovered during this process, correcting entries are made in order to rectify them. Sometimes, errors could exist even when the balances of debits and credits are equal. This happens, as a result, of double posting or failure of recording a transaction.

·         Adjusting entries: The fifth step involving in a recording process is the step of adjusting the entries of a transaction. It is prepared as an application of the real basis of the accounting. Many of the times, at the end of the accounting period various expenses, are incurred that have not been recorded in the journals. Likewise, various incomes that have been earned is also not recorded in the journals. Thus, adjusting entries are prepared in this regard that thereby adjusts the left incomes and the expenses before they are concluded in the financial statements. Adjusting entries of allowances, depreciation, deferrals, etc. is also made.

·         Adjusted trial balance: Many of the times the trial balances are also adjusted, as a result, of any discrepancy in the transactions. It is prepared once the adjusting entries are made and, prior to the preparation, of financial statement. The step of adjusting the trial balance is simply made to ensure whether the debits are equal to the credits or vice-versa.

·         Financial Statements: After all the adjustments of the trial balances and several entries comes the step of preparing a financial statement of the transaction. When the accounts are being checked of the flaws and the balance of the debits and the credits is ensured, the financial statement is prepared. The financial statement is the tail end of a business transaction.

 Closing entries: The preparation of financial statement is further followed by the preparation of closing entries. Temporary or nominal accounts are closed to prepare a proper system of next accounting period. The temporary accounts include in them the income, expenses and withdrawal accounts that are closed to give rise to the next accounting system. These are closed to a summary account. Real or permanent accounts like balance-sheet accounts are never closed.

·         Post closing trial balance: A post closing trial balance is lastly prepared again to check the equality of the debits and credits after the closing entries are made.

Thus, these were the steps involved in the recording processes of the accounting. Once the transaction goes through all the above listed steps, it becomes free of all the flaws and the discrepancies. Hence, anybody could take a look into it and eventually a proper and a perfect account is maintained.