THE ACCOUNTING PROCESS

Accounting is called the language of business because it is so widely used in describing all

types of business activities. Accounting is an information system. Being an information

system it identifies, records, and communicates economic events relevant to a particular

organization. The accounting process consists of these three basic activities of accounting,

i.e., identification recording communication.

IDENTIFICATION Transactions are the economic events of the enterprises that are recorded. A company may

carry on many activities that do not in themselves represent business transactions. Hiring

employees, answering telephone, talking with customers are examples. Each transaction

must be analyzed in terms of its effect on the components of the basic accounting equation.

The total assets equal the total of liabilities and equity. Assets = Liabilities + Owner’s Equity.

This is the fundamental accounting equation.

The assets of an entity are the things of value that it owns. The sources of funds used to

acquire assets are liabilities and equity. Liabilities are sources from creditors. Equity consists

of (a) funds obtained from equity investors, who are owners and (b) retained earnings

resulting from the entity’s profitable operation.

Accounting systems are set up in such a way that a record is made of two aspects of each

event that affects these records, and in essence these aspects are changes in assets and

changes in liabilities or equities.

The equality of the basic equation must be preserved. Therefore, each transaction must

have a dual effect on the equation.

Identification

Select Economic Events, i.e.,

Transactions

Recording

Record: Journalize Classify: Ledger

& Summarize: Trial

Balance

Communication

Prepare accounting reports

Analyze and interpret

for users

DEBITS AND CREDITS The terms debit and credit mean left and right, respectively. They are commonly abbreviated

as Dr. for debit and Cr. for credit.

Each transaction must affect two or more accounts to keep the basic equation in balance. In

other words, for each transaction debits must equal credits in the accounts. The equality of

debits and credits provides the basis for the double entry system of recording transactions.

RULES FOR DEBITS AND CREDITS The basic accounting equation is

Assets = Liabilities + Owner’s Equity

Assets : Increase Debit

Decrease Credit

Liabilities: Decrease Debit

Increase Credit

Owner’s Equity: Decrease Debit

Increase Credit

RECORDING Recording consists of keeping a chronological dairy of measured events in an orderly and

systematic manner called journal. Economic events are also classified, which known as

ledger and summarizing the classified accounted and communicated to interested users

through accounting reports.

THE JOURNAL Transactions are initially recorded in chronological order in a journal before being

transferred to the accounts. Thus the journal is referred to as the book of original entry. For

each transaction the journal shows the debit and credit effects on specific accounts.

THE ACCOUNT: An account is an individual accounting record of increases and decreases in a specific asset,

liability or owner’s equity item. In its simplest form, an account consists of three parts:

the title of the account

a left or debit side

a right or credit side

The entire group of accounts maintained by a company is called the ledger. A general ledger

contains all the assets, liabilities and owner’s equity accounts.

THE TRIAL BALANCE

A trial balance is a list of accounts and their balances at a given time. Usually a trial balance

is prepared at the end of an accounting period. The primary purpose of a trial balance is to

prove or check that the debits equal the credits after posting. If the debits and credits do not

agree, the trial balance can be used to uncover errors in journalizing and posting. However, a

trial balance does not guarantee that all recorded transactions are correct.

COMMUNICATION The identifying and recording activities are of little use unless the information is

communicated to interested users. Financial information is communicated through

accounting reports, which are called financial statements. Usually four financial statements

are prepared from the summarized accounting data: income statement, owner’s equity

statement, balance sheet and statement of cash flow. A vital element in communicating

economic events is the accountant’s ability to analyze and interpret the reported

information. Analysis and interpretation involves the use of ratios, percentage, graphs,

trends, relationships, explanation of limitation and meaning of reported data and so on. ______________________________________________________________________________________ References: 01. Anthoney Robert, N - Essentials of Accounting. 02. Weygandt, Kieso, Kell - Accounting Principles.

EXERCISE ON ACCOUNTING PROCESS

Problem: 1

Mr. Tareq started a merchandising business on 1st January 2003, by bringing cash Tk. 30,000 and furniture worth Tk. 18,000 as capital. During the month, the following transactions took place in his business.

Date Transaction Tk.

04.01.03 Purchased on cash goods for resale 3,000

10.01.03 Purchased goods for resale from Karim & Brothers on credit 6,000

12.01.03 Purchased furniture for use in the business 2,000

18.01.03 Cash sales 2,500

19.01.03 Paid cash to Karim & Brothers 4,000

24.01.03 Sold goods to Mr. Rahman on credit 9,000

27.01.03 Paid Rent of the current month 1,500

28.01.03 Sold goods for cash 2,500

29.01.03 Collected cash from Mr. Rahman 6,000

30.01.03 Paid for salary of the current month 1,200

Please analyze the events and complete upto trial balance.