The accounting process consists of the following four steps: i) Recording the Transactions ii) Classifying the Transactions iii) Summarising the Transactions iv) Interpreting the Results.

Recording the Transactions:

•The accounting process begins with recording of transactions in the books of original entry. The book used for the original entries is called 'Journal’.

•Business transactions are recorded in the journal as and when they occur in the order of dates.

•Entries in the journal are made on the basis of various vouchers such as cash memos, invoices, receipts, etc.

Classifying the Transactions:

•The second step is to group the transactions of similar nature and post them in different accounts in another book called the 'Ledger’.

•For example all transactions relating to cash are brought together and are recorded at one place in Cash Account in the ledger.

•Similarly, dealings with different persons are recorded separately in the account of each person.

•The accounts so prepared are totaled and balanced periodically to know the net effect of related transactions.

Summarizing the Transactions:

•The next step is to prepare a year-end summary known as 'Final Accounts’.

•But before final accounts are prepared, we prepare a statement called 'Trial Balance' to test the arithmetical accuracy of the work done.

•In other words the trial balance is prepared to find out whether the Principle of Double Entry has been strictly followed or not, while recording the transaction.

Summarizing the Transactions:

•Then, with the help of the trial balance and some other relevant information we prepare the final accounts.

•The objectives of preparing the final accounts are: (i) to know the net result of business activities, and (ii) to know the financial position of the business.

•The final accounts consist of an income statement called 'Trading and Profit and Loss Account', and a position statement called 'Balance Sheet’.

•The Trading and Profit and Loss Account is prepared to know whether the business unit has earned profit or incurred loss.

•The Balance Sheet is prepared to know the financial position of the business, i.e., what the business owns and what it owes.

Interpreting the Result:

•The results are then analyzed and interpreted with a view to assess the performance of the business, its future profit-earning capacity and its ability to pay short-term and Igng-term debts.

•The results and conclusions thus arrived at are reported to the interested parties like investors, management, bankers, creditors, tax authorities, etc.

•The balances on various accounts shown in the Balance Sheet will then be transferred to the new books of account for the next year.

•The process of recording transactions 1 for the next year is again started.

•This continuous process of accounting is referred to as the 'Accounting Cycle' because it repeats itself regularly and in the same order.

Accounting cycle