P1 the Purpose of Accounting

Topics: Income statement, Revenue, Generally Accepted Accounting Principles Pages: 9 (2139 words) Published: April 10, 2013
P1 Describe the purpose of accounting for an organisation

What is accounting

Accounting is a recording, reporting, and analysis of financial transactions of the business. The person which is in charge or accounting is known as an accountant, this person is specifically in charge to follow rules and regulations, such as the generally accepted accounting principle. Accounting lets businesses to analyze the financial performance of the business, and look for statics such as net profit.

The accounting process

The accounting process is a chain of activities that begins with an operation and ends with the closing of the books. Because this procedure is repeated every reporting phase, it is referred to as the accounting cycle and includes these key steps:

1. Identify the transaction or other familiar event

2. Arrange the transaction’s source document such an order or buy. The source document is the original record of a transaction. During an audit, source documents are used as evidence that a particular business transaction occurred. Examples of source documents include:

Cash receipts
Credit card receipt
Cash register tapes
Customer invoices
Supplier invoices
Purchase orders
Cancelled checks
Payment stubs for interest
Time cards
Deposit slips
Notes for loans

Every source document should include the date, the amount, and a description of the transaction. When sensible, further than these least amount requirements source documents must enclose the name and address of the former party of the contract.

When a source document does not be, for example, when a cash receipt is not provided by a trader or is missing, a document should be generated as soon as possible after the transaction, using other documents such as bank statements to support the information on the generated source document.

3. This part analyses and classifies the transaction. This step of the process involves quantifying the transaction in financial terms, identifying the accounts that are affected and whether those accounts are to be debited or acknowledged.

4. Record the deal by making entries in the appropriate journal, such as the sales journal, purchase journal, cash receipt or expenditure journal, or the universal journal. Such entries are made in sequential direct.

5. Place wide-ranging journal entries to the ledger accounts. The general journal is structured as a sequential record or transactions; the ledger is organised by account. In casual use the accounts of the general ledger frequently take the procedure of simple two column T-accounts. In the formal records of the company they may contain a third of fourth column to display the account balance after each posting.

6. Arrange the trial balance to make sure that debits equal credits. The trial balance is a list of all of the ledger accounts, with debits in the left column and credits in the right column. At this point no adjusting entries have been completed. The actual sum of each column is not important. What is essential is that the sums be equal. Note that while out of balance columns indicate a recording error; balanced columns do not assurance that there are no errors. For example, not recording a transaction or recording it in the wrong account would not cause an imbalance.

7. Correct any discrepancies in the trial balance. If the columns are not in balance, look for maths errors, posting errors, and recording errors. Posting errors include: •Posting of the wrong amount

Omitting a posting
Posting in the wrong column, or
Posting more than once.
8. Prepare adjusting entries to record accrued, deferred, and estimated amounts. Adjusting entries are journal entries made at the end of the accounting period to allocate revenue and expenses to the period in which they really are relevant. Adjusting entries are required because normal journal entries are based on actual transactions, and the date on which these transactions, and the...
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