Accounting Process; Definition, Activities and Users

Accounting Process; Definition, Activities and Users

As considered one of the top careers in business administration field, accounting is so popular and frequently rates among the most popular minors in business schools. One of the famous accountant is Diemer Walter, he is one of the well-known accounting celebrities in Philadelphia since 1926, and he is also the creator of "Bubble Gum" known as "Bibber Blubber". 

As a process performed by accountants, accounting process, by definition, is the process of recording financial transactions in any company or business, which includes different steps, such as summarizing, analyzing ad finally reporting these transactions to interested parties inside and outside the company, like investors, creditors and tax agencies.

This is one of the key functions of any company handled usually by a bookkeeper in finance and accounting departments. Reports are usually generated via different streams of accounting, such as managerial and cost accounting. No matter how big the company is, the accounting process is essential for decision making and cost reduction strategies formulated by top managers.

Accounting Three Default Activities

1)    Identification

Initially, accounting process starts with economic events identification, economic events can take the form of sale or purchase of any kind inside the business. This process implies the determination of which transactions are to be recorded. Examples can be goods purchased, cash received, or debt payment.

2)    Recording

Once the accountant identifies economic events, recording process should start in order to provide historical value to the company financial activities by arranging a systematic chronological diary of events measured in local currency.

3)    Communication

Accounting data are needed by internal and external users, such as managers, investors, tax agencies and creditors. The last activity an accountant needs to do is to communicate accounting recorded data to interested users via accounting reports and statements, such as income statement, cash flow statement, retained earnings statement and balance sheet (sometimes called financial position statement). The first three statements represent company records for a period of time (month, quarter or year). The last one is prepared at a point of time (specific date). The accountant also must be capable of analyzing and interpreting the communicated information. Interpretation means to explain its uses and limitations to interested parties in the form of statement notes.

A final activity is the bookkeeping process, you can find detailed illustration of it in this link: "The Bookkeeping Language, Terminology, and Commonly Used Terms".

                                                                    

The Bookkeeping Language, Terminology, and Commonly Used Terms

To communicate, you need a language, symbols, letters and expressions that can better tell the other party what’s in your mind. In bookkeeping, language needs to communicate different accounting transactions and daily operations being processed inside your business; it needs to be proper and precise, standing on solid terminologies that can clarify what exactly the sender wishes to communicate to the receiver in his message. ABC of bookkeeping language reflects an array of terms and definitions frequently used by accountants, bankers, bookkeepers or other business associates; both parties in this communication process need to precisely understand what the other party intends by using specific terminologies.

Bookkeeping, hence, has its own lingo which is pretty much identical in many nations; however, it does not always embrace the same meaning due to controversial scenarios of financial transactions.If “Grammaire” is the underlying footing of the French language, bookkeeping also has its own grammaire that regulates its different facets. One of the distinguished rules in bookkeeping is the “Debit and Credit” rule of thumb which splits different entries into debit, such as cash-ins and equipment, or credit, such as revenues and cash-outs.

Owner’s Equity and Stockholders’ Equity

Likewise, terminologies employment in bookkeeping varies according to different business scenarios. For instance, in sole proprietorship the frequently used term for capital is owner’s equity, reflecting the property of capital in the hands of a single owner; on the other hand, using stockholders’ equity term is relevant to corporation type of business organizations; in corporations, capital is disbursed among different shareholders who invest their savings in the business in the form of interest bearing stocks. The difference between the two terms cannot be overlooked in bookkeeping speech.

Bookkeeping Core Terminologies

Intact bookkeeping reflects the proper preparation of financial statements commonly used in any business entity (Balance Sheet, Income Statement, and Cash Flow Statement). The components constituting these financial statements are common concepts used in the world of accounting among different users. Examples are assets, liabilities, equity, operational income, operating expenses, and so forth. Each terminology has its own integer meaning and leaves a describing image in the receiver’s mind. The following short definition can help understand the referring significance for these terms.

Assets: are resources owned by the company, such as cash, equipment, supplies, land, etc.

Liabilities: are obligations the company owes, such as loans, accounts payable, notes payable and bonds.

Administrative Expenses: are outgoings the company incurs indirectly relevant to a specific function, such as manufacturing or sales, sometimes called administrative costs.

Property: reflects the same significance as assets.

P.P.E: Property, Plant & Equipment, an asset account which comprises long-term tangible assets, such as plant facilities, land, heavy outfits, and so forth.

Cash Inflows/Outflows: refers to the duplex operation involved to cash-ins, such as cash receipts from trade customers, sale of spare assets, receipts from factoring and personal funds invested, and cash-outs, such as payment of wages, purchasing equipments, income tax and interest on bank loans.

Among others, these terms form integral parts of commonly used financial statements; P.P.E, for instance, can be found in the assets sections of the classified balance sheet, while depreciation expense, which is a contra asset account, can be found in income statement.