“Accounting is a systematic approach to recording of numerical information gathered from economical transactions and makes interpreting & reporting smoother.”
Accounting is Science of recording and Art of presenting information, so that interpretation & comparison become smoother.
Accounting it-self is no a complete system, but it involves various process, such as gathering of information, recording of numeric information gathered in a defined manner, summarizing of information recorded and presenting the information in a variety of manners as required.
In simple words Accounting is the recording of financial transactions, sorting & grouping of similar transactions together to generate reports from the sum total of balances of various categories / groups.
Accounting only include transactions which can be measured in monetary terms. Non monetary transactions are not included in accounting… such as new Manager hired, but only cost of his services are accounted like salary & like.
All transactions of similar nature are grouped together in single transaction & is called “Ledger“
Accounting Process :
| 1 | Gathering of Information | This is the base step of Accounting System involves collection of information in various forms/media, such as Sales Invoices, Purchase Invoices, Cash Vouchers, Cheques issued/received etc. |
| 2 | Recording of Numeric Information | This is also known as Book-Keeping. On the base of various documents, each and every transactions is recorded in chronological order as per rules and guidelines. First each transaction is recorded in Day Book and from it there will be effect of such transaction is respective account ledger. |
| 3 | Summarizing of Information | his is known as Balancing. In this process every account is balanced, on base of transactions recorded, on monthly/quarterly/half-yearly or yearly as required. In this process a statement is prepared called TRIAL BALANCE. |
| 4 | Presenting the Information | This is the final step for closing of books also known as Finalizing. From the report prepared in previous step TRIAL BALANCE, two/three (as required) report is prepared; (i) Trading Account (ii) Profit & Loss Account (iii) Balance Sheet. |
Accounting Reports :
| 1 | Day Book | This is first report or we can say as “Base Report” from which further processing is done such as posing of transactions in respective accounts. |
| 2 | Account Ledger Book | This book involves various ledgers with which transactions have made, such as Capital Accounts, Fixed Assets Accounts, Sundry Debtors/Creditors Accounts, Sales/Purchase Accounts etc. |
| 3 | Trial Balance | This report is prepared from the Account Ledger books. Every Account in Accounts Ledger Books are balanced i.e. made net off and balance of each account is recorded in this statement. |
| 4 | Trading Account | This report is prepared from Trial Balance. This report required picking and recording only those balances of Income & Expenses ledger which directly involves in operation of entity, such as Sales, Purchase, Stock, Freight etc. Balance of this report is known as Gross Profit/Loss. |
| 5 | Profit & Loss Account | This report is prepared after preparing Trading Account and the balance of Trading Account is recorded in this for further balancing. In this report those expenses ledger’s balances are recorded which are not presented in Trading Account. Basically this report involves recording of Indirect Income & Expenses such as Interest Income, Interest Expenses, Salary Payment, Rent Expenses, and Legal Fees etc. |
| 6 | Balance Sheet | Previous two mentioned are account, while this is statement, previous two accounts shows difference of transactions during particular period, while Balance Sheet present the positing of entity as on specific date. This shows Assets & Liabilities of business, receivable from & payable to outside person/entity, Capital of Owners etc. |