THE ACCOUNTING PROCESS

Accounting is called the language of business because it is so widely used in describing all
types of business activities. Accounting is an information system. Being an information
system it identifies, records, and communicates economic events relevant to a particular
organization. The accounting process consists of these three basic activities of accounting,
i.e., identification recording communication.

Identification

Recording

Communication

Select Economic
Events, i.e.,
Transactions

Record: Journalize
Classify: Ledger
&
Summarize: Trial
Balance

Prepare accounting
reports
Analyze and interpret
for users

IDENTIFICATION
Transactions are the economic events of the enterprises that are recorded. A company may
carry on many activities that do not in themselves represent business transactions. Hiring
employees, answering telephone, talking with customers are examples. Each transaction
must be analyzed in terms of its effect on the components of the basic accounting equation.
The total assets equal the total of liabilities and equity. Assets = Liabilities + Owners Equity.
This is the fundamental accounting equation.
The assets of an entity are the things of value that it owns. The sources of funds used to
acquire assets are liabilities and equity. Liabilities are sources from creditors. Equity consists
of (a) funds obtained from equity investors, who are owners and (b) retained earnings
resulting from the entitys profitable operation.
Accounting systems are set up in such a way that a record is made of two aspects of each
event that affects these records, and in essence these aspects are changes in assets and
changes in liabilities or equities.
The equality of the basic equation must be preserved. Therefore, each transaction must
have a dual effect on the equation.

DEBITS AND CREDITS

The terms debit and credit mean left and right, respectively. They are commonly abbreviated
as Dr. for debit and Cr. for credit.
Each transaction must affect two or more accounts to keep the basic equation in balance. In
other words, for each transaction debits must equal credits in the accounts. The equality of
debits and credits provides the basis for the double entry system of recording transactions.

RULES FOR DEBITS AND CREDITS

The basic accounting equation is
Assets = Liabilities + Owners Equity
Assets :
Increase
Debit
Decrease
Credit
Liabilities:
Decrease
Debit
Increase
Credit
Owners Equity:
Decrease
Debit
Increase
Credit

RECORDING
Recording consists of keeping a chronological dairy of measured events in an orderly and
systematic manner called journal. Economic events are also classified, which known as
ledger and summarizing the classified accounted and communicated to interested users
through accounting reports.

THE JOURNAL
Transactions are initially recorded in chronological order in a journal before being
transferred to the accounts. Thus the journal is referred to as the book of original entry. For
each transaction the journal shows the debit and credit effects on specific accounts.

THE ACCOUNT:
An account is an individual accounting record of increases and decreases in a specific asset,
liability or owners equity item. In its simplest form, an account consists of three parts:
the title of the account
a left or debit side
a right or credit side
The entire group of accounts maintained by a company is called the ledger. A general ledger
contains all the assets, liabilities and owners equity accounts.

THE TRIAL BALANCE

A trial balance is a list of accounts and their balances at a given time. Usually a trial balance
is prepared at the end of an accounting period. The primary purpose of a trial balance is to
prove or check that the debits equal the credits after posting. If the debits and credits do not
agree, the trial balance can be used to uncover errors in journalizing and posting. However, a
trial balance does not guarantee that all recorded transactions are correct.

COMMUNICATION
The identifying and recording activities are of little use unless the information is
communicated to interested users. Financial information is communicated through
accounting reports, which are called financial statements. Usually four financial statements
are prepared from the summarized accounting data: income statement, owners equity
statement, balance sheet and statement of cash flow. A vital element in communicating
economic events is the accountants ability to analyze and interpret the reported
information. Analysis and interpretation involves the use of ratios, percentage, graphs,
trends, relationships, explanation of limitation and meaning of reported data and so on.

______________________________________________________________________________________
References:
01. Anthoney Robert, N - Essentials of Accounting.
02. Weygandt, Kieso, Kell - Accounting Principles.

EXERCISE ON ACCOUNTING PROCESS

Problem: 1

Mr. Tareq started a merchandising business on 1st January 2003, by bringing cash Tk.
30,000 and furniture worth Tk. 18,000 as capital. During the month, the following
transactions took place in his business.
Date

Transaction

Tk.

04.01.03

Purchased on cash goods for resale

3,000

10.01.03

Purchased goods for resale from Karim & Brothers on credit

6,000

12.01.03

Purchased furniture for use in the business

2,000

18.01.03

Cash sales

2,500

19.01.03

Paid cash to Karim & Brothers

4,000

24.01.03

Sold goods to Mr. Rahman on credit

9,000

27.01.03

Paid Rent of the current month

1,500

28.01.03

Sold goods for cash

2,500

29.01.03

Collected cash from Mr. Rahman

6,000

30.01.03

Paid for salary of the current month

1,200

Please analyze the events and complete upto trial balance.