State the three fundamental steps in the accounting process.
The fundamental steps in the accounting process are diagrammatically presented below.
Identifying the financial transactions: Identification implies determining what transactions are to be recorded i.e.. items of financial character are to be recorded. For example, goods purchased for cash or on credit will be recorded. Items of non-financial character such as changes in managerial policies, etc. are not recorded in the books of accounts.
Recording in book of original entry: A book of original entry refers to an accounting book where all business transactions are initially recorded. This book can also be called a first entry or preliminary entry. The information that is contained in the books of original entry are summarised and recorded in the general ledger, which is then used to prepare trial balance and the financial statements.
Classifying individual Account: We can classify the financial accounts under two types of accounts, one is the Traditional Approach and another one is the Modern Approach. Let us deal here with the traditional approach.
We can classify the accounts as per the traditional classification under the following heads:
I. Personal Accounts
- Natural Personal Accounts
- Artificial Personal Accounts
- Representative Personal Accounts
II. Impersonal Accounts
- Real Accounts
- Nominal Accounts
We can classify the accounts as per the traditional classification under the following heads:
- Assets Accounts
- Liabilities Accounts
- Capital Accounts
- Revenue Accounts
- Expenses Accounts
Preparing financial Statement: The primary objective of a financial statement is to provide financial information about the company such that it can help the stakeholders and other users take economic decisions including past performance and current position assessment, predict and judge a company's growth and predict its situation on bankruptcy or any kind of failure.
Communicating to Different Users: As a measurement and communication process for business, accounting supplies information that permits informed judgments and decisions by users of the data.