The standard accounting process is a set of steps that guides a standard of conduct for creating and maintaining a detailed and accurate ledger, whether on paper or in a computer program.
Maintaining the necessary financial records to track transactions revolves around the ledger. At the heart of maintaining the ledger is a process known as the accounting cycle. This is a systematic sequence of steps that supports the collection, processing, and reporting of financial data. While many versions of the accounting cycle encompass more detail, the general (standard) process includes five key steps essential to ensuring the integrity of a company's accounting process.
An accounting system must ensure that the accounting cycle is carried out completely and correctly; in doing so, it acts as part of the internal control system and eliminates risks for the business.
1. Analyze and accurately determine the nature of the transaction.
The cyclical nature of the accounting process begins with transactions, and these can be anything that affects your company's financial situation. At a minimum, any company should collect:
- Sell
- Purchase
- External transactions such as exchanges with other companies.
- Internal transactions such as exchanges between departments.
- Anything else that might be financial in nature and measurable.
Although these are economic and financial transactions, each transaction is carried out within a profound legal context. For example, how is a transaction recorded as a sale? Suppose you have delivered goods but not yet received payment; what type of transaction is this? Determining the type of transaction dictates how it is recorded in the accounting system, and therefore determines the reported outcome and all subsequent information.
2. Record it in the journal.
Recording transactions is a procedure called journaling. This is a list of transactions recorded in chronological order of the transactions identified during the analysis period. The double-entry accounting system records each transaction as a journal entry consisting of four parts. These parts are:
- Account and debit amount
- Account and credit amount
- Trading day
- Transaction description
All transactions are recorded as both debit and credit entries; this is called double-entry bookkeeping.
Double-entry bookkeeping is the practice of recording transactions in at least two accounts to reflect the economic events that occur, accurately reflecting the impact of those transactions on the accounting objects.
The reason is that every economic transaction in a business always involves at least two accounting objects, and each accounting object has a separate account for tracking. Therefore, each economic transaction will involve at least two accounts. Thus, double-entry bookkeeping, or double-entry recording, is essentially a method of recording the monetary value of an economic transaction into the relevant accounts based on the economic content of the transaction.
3. Summary by accounting account
In the era of pen-and-paper accounting systems, journals served as operational copies of the ledger. Today, this aggregation is typically an automated function at the end of the day or some other financial period, performed by an accounting software application.
However, this is also a step that both the implementer and the manager need to know because it will be useful when checking and using data. Some examples are as follows:
- For businesses with high transaction volumes, such as retail and e-commerce, reviewing the entire transaction log isn't always necessary; in these cases, managers only need to see a summary of daily transactions of a specific type.
- When a parent company maintains separate accounting records for each subsidiary, the total accounts from the subsidiaries are transferred to the parent company's account.
4. Prepare an unadjusted balance sheet.
Because double-entry accounting involves debiting and crediting entries for every transaction, these amounts must always match. When they don't, it indicates a problem that needs to be followed up on. These comparisons are called trial balances. Unadjusted trial balances may arrive before late transactions or error corrections are made.
The adjusted test balance reflects all financial activity that occurred during the period of the final procedures.
5. Prepare financial statements.
After completing the adjusted test balance, financial reports for an accounting period (month, quarter, year, or a custom period) are generated. These reports vary depending on the period and the reports required. Representing the completion of an accounting cycle, the ledger accounts are reset to zero to prepare for the next cycle, starting again with transaction analysis.
If your business has any questions or difficulties with the accounting process, please refer to this information. Tax accounting services Contact Expertis for answers and support from experts!