What is Accounting, Types of Accounting, Detailed overview of Accounting cycle
What is Accounting?
Accounting is the process of recording,
summarizing & analyzing financial transaction of a business in such a way
that it is presentable to others users. other users include investors,
shareholders, partners of business, tax collection authorities.
Types of Accounting
- Financial Accounting
- Managerial Accounting
- Cost Accounting
Financial Accounting
Financial Accounting refers to process
of preparing Financial Statements. Financial statement includes 4 reports.
- Profit & loss account / income statement / Statement of comprehensive income.
- Balance sheet / Statement of financial position.
- Statement of cash flow.
- Statement of changes in Equity.
Managerial Accounting
Managerial accounting use much of data
that relates to financial accounting.
Managerial accounting is the process of preparing monthly accounts that
is used by the management of company to make decisions. Following are the reports
used by management to make financial decisions.
- Monthly financial statements.
- Budgeting reports.
- Projected financial statements.
Cost Accounting
Cost accounting helps management to make
product costing. In cost accounting process, we process different reports
relates to material, labor & overhead to reduce the cost per unit.
Accounting cycle
Accounting cycle is the systematic step
by step process of recording, processing & analyzing the financial
transaction.
Theses are the steps uses in Accounting
cycle.
- Journalizing
- Ledger Accounts
- Un-adjusted trial balance
- Performing adjusting entries
- Adjusted trial balance
- Financial statements
- Closing books of accounts
- Post-closing trial balance
Journalizing
Journalizing is the process of analyzing
transaction and post as journal entries in books of accounts.
It is the first step of accounting
cycle. Its start from the beginning of the financial year and ends with the
ending of financial year.
We analyze each transaction according to
their type like it’s a expense, income, assets, liabilities, drawings, capital,
sales or purchase and post them to their debit credit rule. We prepare
- Sales journal: here we record sales transactions
- Purchase journal: here we record purchase transactions
- General journal: here we record other transactions
Ledger Accounts
In this step we transfer entries from journals
to ledger accounts. It’s a second step of accounting cycle.
In this process amounts are transferred in
ledger in such a way that, debit side amounts of journals are transferred to debit
side of ledgers and credit side of amounts of journals are transferred to
credit side of ledger.
We can say that expenses come debit side
of general journal and when we transfer these expenses into ledger, we will
also debit the expense ledger with the same amount.
After posting all entries into ledger we
make total and calculate balance of each ledger.
Cash Account
Dr
|
Cr
|
10000 Opening balance
50000
4000
1000
|
50000
15000 (Debit balance closing)
|
65000
|
65000
|
In cash, expenses we deduct credit
balance from debit balance.
Accounts payable
Dr
|
Cr
|
50000
15000 (Closing balance Credit)
|
10000 opening balance
50000
4000
1000
|
65000
|
65000
|
In liabilities we deduct debit balance
from credit balance.
Un-adjusted trial balance
It’s a 3rd step of accounting
cycle. Trial balance is a list of all ledgers account balances. Trial balance
of company is preparing on a specific point usually at the end of month or
year.
Both sides of trial balance must be
equal. Any difference shows mistake in posting or in calculations.
Adjusting entries
Adjusting entries are recorded at the
end of the year. It’s an adjustment of income and expenses. We make accounting
transaction on accrual basis. The main purpose of adjusting entries is to
adjust the income and expenses according to final year. Like
We have financial year from July to June
and we paid rent of the building for one year in January its mean we paid rent
for 6 months of this financial year and remaining for next financial year. That’s
why we will adjust the rent of next financial year and make adjusting entry to
adjust it.
Adjusted Trial balance
After posting adjusting entries we
prepared trial balance again its called adjusted trial balance. Its include list
of adjusted income and expenses balance with assets, liabilities, capital, drawings balances.
Financial statements
Financial statements are set of
documents which provide company financial position, indicate its performance. Following
are the components of financial statements.
- Income statement
- Balance sheet
- Statement of Cash flow
- Statement of changes in equity
- Notes & other disclosures
Interim Financial statement
Quarterly or Year yearly financial
statements are called interim financial statement. These are prepared in condense
format. Its mean disclosure is shown less as compared to annual reports disclosure.
Quarterly reports are un-audited but half yearly reports are reviewed by the auditors
for checking authenticity of financial data.
Annual financial statement
Financial statements which are prepared
on annually is called annual financial statement. These financial statements
are audited by chartered accountant or Certified public Accountant and
published along with director reports, overview of company and its past results.
Closing entries
In this step closing balances of income,
expenses, dividends, drawings, withdrawals are transfer to capital accounts.
In case of company all these balances
are transferred to retained earnings. In case of Partnership or sole proprietorship
all balances transfer to its capital account.
Post-closing trial balance
After posting the closing entries a list
of all accounts balances is prepared is called post-closing trial balances.
In closing entries, we transfer balances
to permanent account like, capital or retained earnings. Now post-closing trial
balance must have equal balance on both side and now ready to transfer the
balances to next year.
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