Accounting Process

The word “Accounting” brings along with itself thousands of years of history and can be traced back to the ancient times. There are proofs which suggest that accounting might be more than 7000 years old. Now, let’s just quickly get back to the modern times and try to understand what really accounting and the accounting process are.

 

Definition of Accounting:  Accounting is a set of concepts and techniques that are used to identify, measure, record, classify, summarize and report financial information of an economic unit to the users of the accounting information. The economic unit is considered as a separate legal entity. Accounting information is widely used by various types of parties for several different reasons. Few of them are

 

 Who uses it  Type of User  Main Purpose
 Business Managers  Internal  For trends, budgeting and detecting performance bottlenecks
 Owners  Internal  To interpret the profit and loss associated with the business
 Employees  Internal  To check the financial health and keep a check on recent developments of  the business
 Investors  External  They provide risk capital, to keep a track of ROI and associated risk
 Lenders  External  Banks, NBFCs etc. they are mainly concerned with the financial stability of a  business to provide loans, overdraft, etc.
 Government  External  Legal purposes of tax calculations, collect state and a country level data
 Research Agencies  External  To analyze financial health and accordingly provide ratings to the business
 Creditors  External  To analyze the liquidity of a business and deciding a credit limit

 

 

Process Flow of an Accounting Transaction

 

Accounting Process Chart

 

Example of Accounting Process: Let’s suppose there is a printer that was bought from HP for 5000 which was ultimately shown in the financial statements as an expense to the business. Now, a purchasing manager looked into the expense at the year-end and recommended (the owners) a few cheaper alternatives to be considered for all future purchases.

 

Let us understand the ideal accounting process in this case

 Process step  Explanation of the steps
 Identify  The transaction “identified” was purchase of printer.
 Measure  The cost of printer was “measured” as 5000.
 Record  The transaction was “recorded” in books systematically as 5000.
 Classify  The transaction was then moved to the ledger and “classified” with similar transactions.
 Summarize  Here the ledger balance was “summarized” and converted into trial balance and financial statements accordingly.
 Analyze  Purchase manager “analyzed” the financial statements at year-end.
 Interpret  The analysis lead to the “interpretation” that the printer was costly and cheaper alternatives were available.
 Communicate  This was “communicated” to the owners as a recommendation for future purchases of this kind.