MBA104 U1- Question - Explain the accounting process.

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Program & Semester: MBA (1st semester)
Subject name: Financial and Management Accounting
Subject Code: MBA104
Unit No.: 1

Question- Explain the accounting process.

Answer - Accounting Process:
1. Identifying the transactions and events This is the first step in the
accounting process. It recognises the transactions that are essential to be
recorded in the books of accounts. When money, goods, or services are
transferred from one person or account to another person or account, it is
known as a transaction. Source documents like receipts, bank statements,
checks and purchase orders are gathered to have a record of the
transactions.
2. Measuring This means expressing the value of events and transactions
in terms of money (Rupees in India).
3. Recording The next process after measuring the transactions is the
recording. It deals with recording of identified transactions and events in a
systematic manner in the books of original entry in accordance with the
principles of accountancy. The book in which transactions are first recorded
is called the Journal.
4. Classifying Classifying and summarizing the recorded transactions help
in presenting the data that is useful to the intended user. Classifying deals
with periodic grouping of transactions of similar nature in a book called
Ledger. The transactions that appear in the books of original entry (Journal)
are transferred to appropriate places in the book of final entry (Ledger) by a
process called Posting. For example, all purchases of goods made for cash
or on credit on different dates are brought to purchases account.
5. Summarising To know whether the objective of the organization to
make profit was achieved, it is necessary to summarise all the transactions
that occurred and are recorded. This requires analysing total expenses or
losses, total income or gain, total assets, and total liabilities. This function
involves the preparation of financial statements such as income statement,
balance sheet, statement of changes in financial position, and cash flow
statement.
6. Analysing It deals with the establishment of relationship between the
various items or group of items taken from income statement or balance
sheet or both. Its purpose is to identify the financial strengths and
weaknesses of an enterprise. It involves using various tools like Ratio
Analysis, Fund Flow Analysis, Cash Flow Analysis, etc. (discussed in
subsequent units).
7. Interpreting Data is presented in a manner that the end user can make
a meaningful judgment about the financial position and profitability of the
business.
8. Communicating It deals with communicating the analysed and
interpreted data in the form of financial reports or statements to the users
of financial information. For example, Profit and Loss account, Balance
Sheet, Cash Flow and Funds Flow statement, Auditors report, etc. It is an
important part of Accounting to decide what to communicate, how to
communicate, how much to communicate, when to communicate, and in
what form to communicate.

Accounting Process:

(Source: Adapted from Financial Accounting, Management perspective by R.

Narayaswamy)
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