Accounting Process

 Accounting Process: Introduction

As and when any transaction or event takes place, it is recorded in the books of the business if it is expressed in terms of money. The recording of transactions is done on the basis of some documentary evidence which is called source documents. As the number of transactions is increasing day by day, it is very much necessary to record the transactions in such a manner that can provide the users the significant and useful information.

Thus, in order to maintain a set of books of accounts, the accounting process provides us the systematic recording. classifying and summarising through the tools of journalizing, ledger posting, and trial balance preparation respectively. Let us understand the accounting process thoroughly with the help of topics stated in upcoming pages.

Meaning of Accounting Process

The accounting process consists of a series of activities or perations aimed to provide financial information on a business entity. The accounting process covers those activities that are involved so that financial information are accumulated and presented in reports that would be useful to interested parties.

The various activities involved in the accounting process have been mentioned below:

(i) Source documents These represents all documents in business which contains financial records and act as evidence of the transactions which have taken place.

(ii) Book of original entry These books are used in recording the transactions for the first time.

These books are maintained for memorandum purposes only and will not form part of the double-entry system. e.g., purchase book, cash book, sales book, return outward book and return inward book, etc.

(iii) Ledger accounts These form part of a double-entry system and used to record the transactions for the period.

These are accounts where information relating to a particular asset, liability, capital, income and expenses are recorded.

(iv) Trial balance It contains the totals from various ledger accounts and act as a preliminary check on accounts before producing final accounts.

(v) Final accounts Financial statements are produced to show the financial performance and financial position of a business entity.

Source Documents

All transactions are recorded in the books of accounts on the basis of

some documentary evidence or supporting papers. Invoices, bills, cash receipts, cheques, pay-in-slips, debit notes and credit notes are generally used as documentary evidences or source documents.

On the basis of these documents, primary entries are made within a journal and ledger. These documents are known as source documents.

(i) Debit note

A debit note is a document evidencing a debit to be raised against a party for reasons other than sale on credit.

On finding that goods supplied are not as per the terms of the order placed, the defective goods are returned to the supplier of the goods and a note is prepared to debit the supplier; or when an additional sum is recoverable from a customer such a note is prepared to debit the customer with the additional dues.

In these two situations, the note is called a debit note.

Specimen of a Debit Note

(ii) Credit note 

A credit note is prepared, when a party is to be given a credit for reasons other than credit purchase.

It is a common practice to make it in red ink. When goods are received back from a customer, a credit note should be sent to him.

Specimen of a Credit Note

(iii) Cash Memo 

When a trader sells goods for cash, he issues a cash memo. When the goods are purchased for cash, he receives cash memo. It is an evidence of each sales and cash purchase. It contains details relating to units sold, rate, total amount and other terms and conditions.

Specimen of a Cash Memo

(iv) Invoice/Bills 

When a trader sells goods on credit, he prepares a sale invoice. The original copy of sale invoice is sent to the purchaser and its duplicate copy is kept for making records.

Similarly, when a trader purchases goods on credit, he receives a bill from the supplier of goods. We make an invoice on credit sale but receive a bill on credit purchase, though the two terms are used synonymously.

Specimen of Invoice/Bill

(v) Receipt 

When a trader receives cash from a customer, he issues a receipt containing the date, amount and the name of the customer. The original copy of the receipt is given to the customer and its

duplicate copy is kept for making records in the books of accounts. In

the same way, whenever we make payment we obtain a receipt from the party to whom we make payment.

Specimen of Receipt 

(vi) Pay-in-slip

 It is a source document used for depositing cash or cheques into bank. It has a counterfoil which is returned to the depositor with cashier’s signature, as receipt. Now-a-days, banks usually place a box in which cheques along with the filled pay-in-slips can be dropped.

In such cases, counterfoils are not signed. Moreover, in modern times, ATM machines and cheque collection machines are being used to receive cash and cheques respectively.

Specimen of a Pay-in-Slips

(vii) Cheque

 A cheque is a document in writing, drawn upon a specified banker and payable on demand. The bank supplies cheque forms. The name of the party to whom payment is made, is written after words 'Pay To'. Then the amount is written– both in words and figures. A cheque must be dated and signed by the drawer.

Specimen of a Cheque