Accountancy is the system of recording and verifying the value of assets, liabilities, income and expenses in the account book which contains debit/credits entries. Financial Accounting is the process of measuring and identifying the overall financial transactions of the business through financial statements are external users on a periodic basis. It is useful to record total income or expenses of the organization for making sound economic decisions.
Financial accounting is based on double booking procedure in which total debits and credits information are recorded. The main purpose of financial accounting is to prepare financial reports that provide overall financial transactions to external users (such as investors, creditors or tax auditors) for getting the knowledge about the business performance.
Accounting Equation
Accounting equation is the foundation of double entry accounting system in which all assets are either financed by borrowing money (liabilities) or paying money to shareholders (equity). Thus Accounting Equation is:
Assets = Liabilities + Shareholder’s Equity
Balance sheet depends on the accounting equation in which total assets of the Company are equal to total liabilities and shareholder’s (or owner) equity.
Accounting Process
The accounting process is the series of activities that starts with the transactions and ends with the closing of accounting books. The series of repeatedly reporting period is called accounting cycle which contains the following steps:
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Identifying the transactions.
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Analyze the transactions.
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Record the transactions by making Journal entries.
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Post journal entries to ledger accounts.
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Prepare Trial Balance to make sure debits amount equal credit amount.
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Adjusting entries to record accurate, deferred and estimated amounts.
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Post adjusting entries to the ledger account.
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Prepare adjusted trial balance.
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Prepare financial statements.
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Prepare closing journal entries that close temporary accounts such as revenue, expenses, gain or loss.
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Post closing entries to ledger accounts.
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Prepare Trial Balance after closing journal entries to make sure debit equal credit.
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