What Is The Accounting Process? 8 Key Steps, Purpose And Types

Accounting Process: Ever thought about how businesses keep track of their financial activities and ensure everything adds up correctly? That’s where the accounting process comes in.

The accounting process is a crucial series of steps used to record, analyze, and summarize financial transactions within a business. It’s important for anyone in business or those pursuing a career in finance to understand this process. By following the accounting process steps, bookkeepers can ensure accurate financial reporting and maintain business integrity.

In this guide, we’ll explain the process of accounting, break down the eight key steps, and explore its purpose and various types & terms. Whether you’re just starting or looking to sharpen your skills, this article will help you master the fundamentals of accounting.

Table of Contents

What is Accounting Process?

The accounting process is a systematic method of recording, summarizing, analyzing, and reporting a business’s financial transactions. It gives a clear view of the company’s financial health and helps prepare essential reports like financial statements. This process follows an eight-step accounting cycle, starting with recording transactions and ending with closing the accounts at the end of a reporting period, such as a month or year.

For example, imagine a small business recording its daily sales, tracking monthly expenses, and preparing reports to share with stakeholders. These steps ensure accurate and organized financial records.

Purpose of the Accounting Process

The accounting process simplifies bookkeeping by breaking it into manageable steps. Here’s why it’s important:

Ensures Accuracy: It helps identify and correct mistakes before finalizing financial reports.
Organizes Data: The step-by-step approach streamlines handling large volumes of financial information.
Supports Decisions: Accurate reports help stakeholders make better financial decisions.
Fulfills Legal Compliance: It ensures financial reports meet legal and regulatory standards.
Tracks Business Performance: Regular cycles help monitor progress and make improvements.

By following and understanding the process of accounting, businesses can stay compliant, manage finances effectively, and support long-term growth.

Also Read: What Is Corporate Accounting? Definition, Types and Functions

8 Accounting Process Steps

The accounting process is a structured method to record, organize, and report financial transactions for a business. It follows eight key steps, collectively known as the accounting cycle, ensuring accuracy and consistency throughout the reporting period. Let’s break it down into simple, actionable steps.

Step 1: Identify and Record Transactions

The process begins with identifying all financial transactions, such as sales, purchases, payroll, or loan repayments. Each transaction is recorded accurately in chronological order.

For example, recording daily sales using a Point of Sale (POS) system or noting employee salaries paid for the month.

Step 2: Create Journal Entries

After identifying transactions, they are recorded in a journal. These entries follow either a single-entry or double-entry system:

a) Single-entry: Similar to managing a chequebook, only one account is recorded.

b) Double-entry: Each transaction affects two accounts, ensuring debits equal credits.

For instance, purchasing office supplies on credit is recorded as:

Debit: Office Supplies
Credit: Accounts Payable

Step 3: Post to the General Ledger

The journal entries are transferred to the general ledger, which categorizes transactions under specific accounts, such as cash, expenses, or revenue. This step provides a clear summary of the company’s financial position.

For example, a cash purchase of equipment will update both the cash and equipment accounts in the ledger.

Step 4: Create an Unadjusted Trial Balance

At the end of the accounting period, the balances from the general ledger are compiled into a trial balance. This serves as an initial check to confirm that total debits match total credits.

Its purpose is to detect discrepancies, such as data entry errors or missing transactions.

Step 5: Analyze and Adjust via Worksheet

If debits and credits in the trial balance don’t match, accountants use a worksheet to analyze errors and make adjustments.

Adjustments may include:

Recording accrued revenues (earned but not yet received).
Accounting for depreciation on assets.

Step 6: Post Adjusting Entries

After identifying necessary adjustments, these entries are recorded in the journal and posted to the general ledger. This ensures the accounts reflect accurate balances.

For example, adjusting for prepaid insurance or unpaid rent.

Step 7: Prepare Financial Statements

The company uses the adjusted trial balance to prepare essential financial statements in the following order:

a) Income Statement: Shows the company’s revenues and expenses.

b) Statement of Retained Earnings: Highlights changes in equity.

c) Balance Sheet: Provides an overview of assets, liabilities, and equity.

d) Cash Flow Statement: Monitors the cash inflows and outflows.

For example, a business might prepare its income statement to analyze monthly profits and losses.

Also Read: Cash Flow from Financing Activities

Step 8: Close the Books

The final step is closing temporary accounts, like revenue and expenses, to prepare for the next accounting cycle. Balances are reset to zero and transferred to permanent accounts (e.g., retained earnings).

For example, closing out the sales revenue account for the fiscal year and starting fresh in the new year.

By understanding and following these accounting process steps, businesses can streamline their financial management and maintain transparency.

Types of Accounting in the Accounting Process

The accounting process includes various types of accounting that focus on different aspects of a business’s financial activities. Here are the main types:

Financial Accounting

Financial accounting includes the preparation of financial reports such as the balance sheet, income statement, and cash flow statement. It summarizes all financial transactions over a specific period, typically a year, to provide an overview of the company’s financial health.

Managerial Accounting

Managerial accounting uses the same data as financial accounting but focuses on providing reports for business managers. These reports help the management team make decisions regarding operations and strategy, often on a monthly or quarterly basis.

Cost Accounting

Cost accounting helps businesses track and manage the costs of producing goods or services. It involves analyzing all costs associated with production, which helps in pricing decisions and budgeting.

Each type of accounting supports different needs within the business, ensuring that financial data is effectively used for decision-making and reporting.

Important Accounting Terms in the Accounting Process

Understanding key accounting terms is essential for grasping the accounting process and successfully navigating the accounting cycle. Here are some important terms:

Transaction: A transaction is any business activity that involves an exchange of value, typically money. This could be a sale, purchase, or payment. It triggers the accounting process by initiating a record of financial activity.
Accounting Period: The accounting period is the time frame for which financial transactions are recorded. It can be conducted monthly, quarterly, or annually, and allows businesses to monitor and assess their performance over defined time frames.
Debit and Credit:
- Debit: A debit indicates an amount that is owed or paid out by the business. For instance, settling a bill or buying goods.
- Credit: A credit indicates an amount the business is receiving, such as revenue from a sale or a loan.
Accrual: Accrual refers to recording financial transactions when they occur, rather than when cash is received or paid. This helps businesses track income and expenses in the correct accounting period, regardless of when the actual payment happens.
Deferral: Deferral is the opposite of accrual. It refers to delaying the recognition of certain revenues or expenses to future periods. For example, recognizing prepaid expenses or deferred income over time.
General Ledger: The general ledger is the central record where all financial transactions are summarized and categorized into accounts. This helps accountants maintain an organized and comprehensive view of all financial activities.

These terms form the foundation of the accounting process steps, ensuring that financial data is organized, accurate, and ready for reporting.

Also Read: Golden Rules of Accounting–Benefits, Types with Examples

Furthermore, understanding the accounting process is essential for anyone involved in business or finance. It not only helps maintain accurate records but also supports decision-making and ensures compliance with legal requirements. By mastering the accounting cycle, businesses can improve financial management and make more informed strategic decisions.

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Accounting Process FAQs

What is the process of accounting?

The accounting process involves recording, summarizing, analyzing, and reporting financial transactions of a business. It helps provide a clear picture of a company’s financial health and is essential for regulatory compliance, tax filings, and decision-making.

What are the 8 key accounting process steps?

The accounting process steps include: 1) Identifying transactions, 2) Recording in a journal, 3) Posting to the general ledger, 4) Creating an unadjusted trial balance, 5) Analyzing the worksheet, 6) Making adjusting entries, 7) Preparing financial statements, 8) Closing the books.

What is the general ledger?

The general ledger is a comprehensive record of all financial transactions within a business. It organizes these transactions by account, helping accountants track and summarize financial data, such as cash flows, to assess the business's financial position.

What is the difference between the accounting process and the accounting cycle?

The accounting process involves tasks like recording and summarizing transactions, while the accounting cycle is the series of steps needed to complete the accounting process. The cycle repeats each reporting period, making the two terms closely related.

Why is the accounting process important?

The accounting process is vital for accurate financial reporting, helping businesses maintain financial transparency, track performance, and comply with tax and regulatory requirements. It also ensures that stakeholders can make informed financial decisions based on reliable data.