Understanding Accounting Process and Its Significance

The assignment content discusses the importance of accounting and its processes, including recording transactions, posting in ledgers, preparing trial balances, and final accounts. The accounting cycle starts with journal entries, followed by ledger posting, trial balance preparation, and finally, financial statement preparation. The purpose is to provide accurate data for business decision-making. If any step is skipped or omitted, the accuracy of the opening balances of later financial years will be distorted.

The purpose of this paper is to provide the user with the necessary instinct about the
whole accounting process, the steps involved, final deliverables etc. Accounting is the art of
recording, classifying and summarizing in a significant manner and in term of money,
transaction and event, which are, in part at least, of financial character, and interpreting the result
thereof. Thus business owner can take important decision with the help of the information
provided by accounting data.
Accounting Cycle starts with the recording of business transaction in the Journal or
subsidiary books and after passing through the Ledger and Trial Balance it results in preparation
of Final Accounts (i.e., Income Statement and Balance Sheet).
 Entries in Journal: Journal is the book of original entry. Transactions are date wise
recorded in this book and due effect is given to the double entry system.
 Posting in Ledger: Ledger is a book which contains all accounts of the business whether
Personal, Real or Nominal. All the transactions entered in the Journal are later transferred
to the Ledger. As such, Ledger is also called a book of final entry. In Ledger all
transactions are recorded in analytical order, i.e. all transactions pertaining to a particular
account are contained at one place in the Ledger.
 Preparation of Trial Balance: Accuracy of Ledger accounts is tested by preparing a
Trial Balance. Trial Balance is the list of debit and credit balances taken out from ledger.
If the total of the debit side of Trial Balance is equal to that of its credit side, it is
presumed that the posting to the ledger is accurate.
 Preparation of Final Accounts (Financial Statements): They provide a summary of the
accounts of a business enterprise, the Balance Sheet reflecting the assets, liabilities and

owner’s capital as on a certain date and the Income Statement showing the result of
operations during a certain period.
All the business decisions are based on data provided by Accounting Process. If a
company or its accounting department tried to skip steps in Accounting Cycle, it would begin to
make decision based on inaccurate data and eventually results in failure of the accounting system
of the company. The omission of any of the steps distorts the accuracy of the opening balances of
later financial year. Omission in Accounting Cycle can be prevented by checking the entries
recorded in Journal, Posting in Ledger and by examining the accuracy of trial balance by
matching the closing balance of each ledger account transferred to trial balance. Like if ledger
posting is skipped, the accountant will not be able to make the final accounts with that much
accuracy. Next, if posting of any ledger balance in Trial balance is skipped then Trial balance
would not match and dual entry system would fail. In the same way preparation of final accounts
cannot be skipped since they are the final deliverables of the whole accounting process.
The major financial statements are comprised of four reports which are Income
Statement, Balance Sheet, Statement of Cash flows and Statement of Retained Earnings. Income
Statement presents the revenue, expense and profit/loss for a particular period. Balance Sheet
presents the assets, liabilities and equity of the entity on a specific date. Statement of cash flow
presents cash inflows and outflows that occurred during a particular period. Statement of
Retained Earnings presents change in equity during a particular period. They all combined
together present the actual financial position and performance of the company.
Managers and business owners must be able to assess the profitability of a company
using information about its financial transactions. By working through accounting cycle one

understands how money flows through a company. This process also helps to understand the
level of attention to each detail that is required in a successful business Venture.