Accounting

Accounting

Accounting is recording, processing and reporting of financial information. However, some people define accounting as process of recording, classifying, summarizing, reporting and interpreting the financial information.

1.   Recording:

Financial transactions are recorded in journal with the help of debit credit rules. These rules of recording the financial transactions have been explained in my other article.

2.   Processing:

Financial transaction is process in the general ledger. This book is used for classification of transaction. The financial information is classified into different accounts. Characteristics of ledger have been explained in my other article. The processing of information is also known as classifying of financial information.

3.   Reporting:

The following Financial reports are generated from the recorded and classified information.

a.    Trial Balance    (Summary of closing balances).

b.    Profit & Loss Account (Statement of comprehensive income).

c.    Balance sheet            (Statement of financial position).

4.   Interpreting the Results:

Financial results may be interpreted by the professionals with the help of different analyses tools and ratios. The business performance is compared with the performance of previous period and performance of other industries.

Advantages of Accounting

Some important advantages of accounting have been described below;

1.   Tracking of information:

Tracking of financial information is an important advantage of Accounting. The tracking of information is require for number reasons like timely payment and receipt, audit purposes, tax purposes etc.

2.   Financial position & Financial performance:

Accounting reflects the accurate financial position and performance of the business. This is an important advantage of accounting. This information is used by the number of stakeholders for making the economic decisions.

3.    Timely Payment and Receipt:

Accounting provides relevant information for making timely payment to creditors. Similarly accounting information is used for making timely collection from the trade debtors. Current asset and current liability section of balance sheet provides useful information about the immediate collection and payments.

4.   Regulator Requirement:

Accounting is a regulatory requirement all over the world. Accounting is an important source of information about the business and therefore it is a mandatory for business world to keep proper books of account.

5.   Basic Control Structure:

Accounting provides a basic control structure for detecting the fraud and mistakes. Trial balance can be used to identify some mistakes; similarly financial analyses may also identify a risk area.

6.   Performance Controls:

Accounting may also be used to evaluate the performance of a manager or regions. This branch of accounting is known as responsibility accounting. In responsibility accounting the organization is divided into different center/section and each section reports are compared for performance evaluation.