PROCESS OF ACCOUNTING - Accounts and Finance for Managers


Financial Accounting is described as origin for the creation of information and the continuous utility of information

After the creation of information, the developed information should be appropriately recorded. Are there any scales/guide available for the recording of information? Yes, What are they?

They are as follows

  • What to record: Financial Transaction is only to be recorded
  • When to record: Time relevance of the transaction at the moment of recording
  • How to record: Methodology of recording - It contains two different systems of viz cash system and accrual system

What is cash system?

The revenues are recognized only at the moment of realization but the expenses are recognized at the moment of payment. For e.g. sale of goods will be considered under this method that only at the moment of receipt of cash out of sale of goods. The charges which were paid only will be taken into consideration but the outstanding, not yet paid will not be considered. For e.g. Rent paid only will be considered but not the outstanding of rent charges.

What is accrual system?

The revenues are recognized only at the time of occurrence and expenses are recognized only at the moment of incurring.
Whether the cash is received or not out of the sales, that will be registered/counted as total value of the sales.
The next most important step is to record the transactions. For recording, the value of the transaction is inevitable, to record values, the classification of values must be

Value at which it is to be recorded ?

There are four different values in the business practices, among the four, which one should be followed or recorded in the system of accounting?

Original Value: It is the value of the asset only at the moment of purchase or acquisition
Book Value: It is the value of the asset maintained in the books of the account. The book value of the asset could be computed as follows
Book Value = Gross(Original) value of the asset - Accumulated depreciation
Realizable Value: Value at which the assets are realized
Present Value: Market value of the asset
Classifying: It is one of the important processes of the accounting in which grouping of transactions are carried out on the basis of certain segments or divisions. It can be described as a method of Rational segregation of the transactions. The segregation generally into two categories viz cash and non-cash transactions.

The preparation of the ledger A/cs and Subsidiary books are prepared on the basis of rational segregation of accounting transactions. For example the preparation of cash book is involved in the unification of cash transactions.

Summarizing: The ledger books are appropriately balanced and listed one after another. The list of the name of the various ledger book A/cs and their accounting balances is known as Trial Balance. The trial balance is Summary of all unadjusted name of the accounts and their balances.

Preparation: After preparing, the summary of various unadjusted A/cs are required to adjust to the tune of adjustment entries which were not taken into consideration at the time of preparing the trial balance. Immediately after the incorporation of adjustments, the final statement is readily available for interpretations.

Purposes of preparing financial statements:

  • Financial accounting provides necessary information for decisions to be taken initially and it facilitates the enterprise to pave way for the implementation of actions
  • It exhibits the financial track path and the position of the organization
  • Being business in the dynamic environment, it is required to face the ever changing environment. In order to meet the needs of the ever changing environment, the policies are to be formulated for the smooth conduct of the business
  • It equips the management to discharge the obligations at every moment
  • Obligations to customers, investors, employees, to renovate/restructure and so on.

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