Meaning of Accounting
Accounting is the systematically identifying, recording, classification, and summarising of financial transactions related to a business. Accounting is a very important function for almost every business. Without accounting, it is very hard to run a business.
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Steps of Accounting
Accounting is not a single thing/ work; there are so many things done by management. So, the steps of accounting are identifying transactions, recording them in a journal, classifying them in the ledger, preparing a trial balance, and, lastly, preparing financial statements.
Identification of transactions:
A transaction means any monetary event of the business that impacts the company’s financial statements. Such as sales, purchases, payments, receipts, investments, etc.
The first step in accounting is to identify transactions. which is happened, that’s a business transactions or owner’s personal transactions. Because only business transactions are recorded in the books of accounts.
Recording in journal:
A journal is a book of primary entry where all business transactions are recorded in chronological order. It is also known as the “book of original entry”. The journal is the foundation for preparing financial statements and reports.
After identifying all the business transactions, the next step is to record them in a journal. The journal is the primary book of accounting, where all business transactions are recorded.
For example, just like a student's rough notes, where they write all types of subjects in under one note, a journal is like that all of his business transactions no matter what type of nature they are, that all will have written in the journal book.
Posting in ledger:
Ledger is the principal book. After recording in the journal, those journalized transactions/ data are classified, and all similar nature of transactions are put together under one head/ account.
All the transactions are recorded in the journal, and the ledger classifies/divides them into different heads/accounts. In the ledger, there are so many accounts created by business management. Like cash account, sales account, purchase account, etc.
Prepare trial balance:
A trial balance is a statement in which all the debit balances and credit balances of ledger accounts are written. This statement is prepared for checking the arithmetical accuracy of the ledger accounts.
It includes a personal account, a real account, and a nominal account. The court did not accept this statement as documentary evidence. A trial balance is the summary of ledger account. This statement helps to prepare the final account.
Prepare financial statement:
The preparation of two different statements to find out the operating result and to know the financial position of the business is known as a financial statement. Those two statements are the income statement and the positional statement.
Income statement:
An income statement is also known as a profit and loss statement (P&L). In the income statement, the company determines how much revenue is earned and how many losses are incurred during the year. In the income statement, there are 2 things prepared by management. One is trading accounting and another one is profit & loss account.
Trading account:
In the trading account, company puts all the direct expenses and losses. Through trading accounts, the company knows the gross profit and gross loss of the business.
Profit & loss account:
In the profit & loss account, company puts all the indirect expenses and losses. Through profit & loss account company identifies the net profit and net loss of the business.
Positional statement:
In a positionalstatement, the company knows the financial position of the business. In that, company prepare balance-sheet.
Balance-sheet:
There are 2 sides in a balance-sheet. one is an asset and another one is a liability. On the asset side, we put all the assets of the company like- current assets, non-current assets, investments, and intangible assets, and on the liability side, we put all the liabilities of the company like- current liabilities, long-term liabilities, and owner’s equity.
In balance-sheet, a company knows how much amount of assets and liabilities a company holds and also knows, numbers of debtors and creditors of the company.
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