Analyzing Financial Transactions
The process of accounting begins by analyzing financial transactions before inputting the transactions that pertain to the business in the system of accounting. For instance, loans made to satisfy personal needs aren't part of the corporate documents.
The initial step in the accounting process is the creation of the source’s documents. A source document or business paper acts as the basis to record a transaction.
Journal Entries
The business transactions are documented in journals (also called Books of Original Entry) in chronological order with the double entry bookkeeping system. Journal entries are recorded in chronological order. journals entries contain two accounts namely credit and debit.
To make this process simpler accountants make use of a special journal for recording the recurring transactions, such as purchases or sales, cash receipts and so on. Transactions that aren't added to the special journal are recorded within the standard journal.
Ledger
A general ledger is a set of accounts that show the modifications made to each account in the light of the past transactions as well as the current balances for each account. It's also known by"the Books of Final Entry.
Unadjusted Trial Balance
An sample balance is created to determine whether the total debits are equal to the total credit. The accounts are taken from the ledger, and then presented in an account report. It is important that the balance of credit and debit columns must be the same.
If the balance is not correct, it has errors that need to be identified and corrected by corrections to entries. It is important to remember that errors could exist even if the credit balance is equal to debits due to mistakes caused by double posting or the absence of entries.
Adjusting Entries
After each accounting cycle, accountants has to create the adjustments entries to make adjustments to the accounts which are summarized on the financial statement. For instance, income that is earned is not is recorded on the book.
Adjusting entries are recorded to account for the accrual of income and expenses depreciation, allowances, prepayments and deferrals.
Adjusted Trial Balance
Once the adjusting entries have been completed the adjusted trial balance has to be calculated. This will be used to check whether the debits correspond to the credits once the adjustments are completed. This is the last step prior to the preparation of the financial statements of the company.
Financial Statements
The financial statements, which comprise those that include the statements of income as well as the statement of change in equity and balance sheet, as well as the statement of cash flow, and notes are the final products of the accounting system.
Closing Entries
To ensure that the system is ready to prepare for the next accounting cycle temporary accounts, which regularly monitored, such as the expense, income and withdrawal accounts are closed. Accounts on the balance sheet,, also known as the permanent accounts remain open until the next cycle of accounting.
The final step of the accounting process is to create the post-closing balance to verify the accuracy of credit and debit amounts following the closing entries have been made. The trial balance includes real accounts, but only because the temporary accounts have been closed in this accounting cycle.
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