Accounting: The Recording Process
Maintaining proper and fine accounts has become very essential today, as a result, of increasing complementation in the business-world. Every business organization is, therefore, supposed to maintain fine accounts comprising of all the financial transactions, financial as well as nonfinancial information. We all know that any accounting involves a fine recording, summarizing, proper classification as well as the interpretation and communication of financial information.
The accounting cycle, therefore, provides a series of procedures regarding the collection, communication and the processing of the financial information. The accounting process as well as process of preparation of tax return Sydney is hence divided into various parts that eventually lead to the maintenance of a proper account of the organization. Financial information of an organization is presented properly in reports. These reports are known as financial statements. But before preparing a financial statement, an accountant needs to gather various details and information about the business transactions of that enterprise. He further needs to record the obtained information and then collate it to come up with a proper report.
The business transaction, therefore, forms a complete cycle and several steps are taken to complete a financial statement. This complete chain of forming a proper business transaction and financial statement in called as a recording process.
The recording process is the whole process that goes on in maintaining a financial statement. From the very starting to the final destination of the statement, the recording process involves various steps that are to be taken to maintain a good and proper account. These steps are nine in number and help to remove all the flaws from the transaction so made. This recording process starts from the very beginning, from the process of identifying and analyzing transactions and events to reaching the post closing trial balance. A brief study of the recording process in accounting is mentioned below
• Identifying and analyzing business transactions:-
Every accounting process of a transaction starts with identifying and analyzing. Under this process, all the important transactions that pertain to a business entity are recorded. Every transaction is identified as to relate to a business entity. After the identification of the transaction, the process of analyzing it starts. The process of analyzing involves the determination of the accounts affected and also the accounts that are to be recorded. This step thus includes the preparation of business documents. The document so prepared serves as the basis of a business transaction.
• Maintaining the records of transactions in a journal:-
A journal is simply a book, either a paper or electronic, in which all the transactions are recorded. After the identification and analyzing process, the transaction goes through the process o recording it in a journal. These transactions are recorded in a journal, using a double entry bookkeeping system. The transactions in a journal are always recorded in chronological order, the journals are, therefore, also known as ‘Books of original entry.’
• Posting a transaction to a ledger:-
Posting the transaction into a ledger further follows the second step. A ledger is nothing but a collection of accounts that present the changes made in each account, as a result, of past transactions and their existing balances. The ledgers are also known as the “Books, of final entry.’ This is the most important step in the recording process of the transaction. After the posting is done, the balances of each account start to be determined.
• Unadjusted trial balance:-
All the balances obtained, as a result, of ledger are further arranged in one report. All the debit balances are further added in it. Along with the debit balances, the credit balances too are added. The balance of the debits and the credits must be equal. However, if any error is discovered during this process, correcting entries are made in order to rectify them. Sometimes, errors could exist even when the balances of debits and credits are equal. This happens, as a result, of double posting or failure of recording a transaction.
• Adjusting entries:-
The fifth step involving in a recording process is the step of adjusting the entries of a transaction. It is prepared as an application of the real basis of the accounting. Many of the times, at the end of the accounting period various expenses, are incurred that have not been recorded in the journals. Likewise, various incomes that have been earned is also not recorded in the journals. Thus, adjusting entries are prepared in this regard that thereby adjusts the left incomes and the expenses before they are concluded in the financial statements. Adjusting entries of allowances, depreciation, deferrals, etc. is also made.
• Adjusted trial balance:-
Many of the times the trial balances are also adjusted, as a result, of any discrepancy in the transactions. It is prepared once the adjusting entries are made and, prior to the preparation, of financial statement. The step of adjusting the trial balance is simply made to ensure whether the debits are equal to the credits or vice-versa.
• Financial Statements:-
After all the adjustments of the trial balances and several entries comes the step of preparing a financial statement of the transaction. When the accounts are being checked of the flaws and the balance of the debits and the credits is ensured, the financial statement is prepared. The financial statement is the tail end of a business transaction.
• Closing entries:-
The preparation of financial statement is further followed by the preparation of closing entries. Temporary or nominal accounts are closed to prepare a proper system of next accounting period. The temporary accounts include in them the income, expenses and withdrawal accounts that are closed to give rise to the next accounting system. These are closed to a summary account. Real or permanent accounts like balance-sheet accounts are never closed.
• Post-closing trial balance:-
A post closing trial balance is lastly prepared again to check the equality of the debits and credits after the closing entries are made.
Thus, these were the steps involved in the recording process of the transaction. Once the transaction goes through all the above listed steps, it becomes free of all the flaws and the discrepancies. Hence, anybody could take a look into it and eventually a proper ad a perfect account is maintained.