Introduction - Process And basis of Accounting | Principles and Practice of Accounting - CA Foundation PDF Download

Process And basis of Accounting

Process of accounting: Accounting process begins with the:

I. Origin and identification of business transactions.

II. Preparation of vouchers

III. Recording in books of original entry

IV. Posting to ledger

V. Preparation of trial balance and financial statements.

Steps are explained as under:

i. Origin and identification of business transactions:

- Accounting deals with only those transactions which are monetary in nature.

- Transactions which cannot be expressed in terms of money will not be recorded.

- For recording all the transactions it is necessary that they must be supported/evidenced by Source Documents

such as cash memo, invoice, bill, pay in slip etc.

ii. Preparation of vouchers:

- on the basis of source documents vouchers are prepared.

- Vouchers are the document which provides authorization to pay and on the basis of which transaction are

- recorded in the books of original entry.

- Separate voucher is prepared for every transaction. 

- It specifies the accounts to be debited or credited. (printed separately by all the firms on their names)

iii. Recording in books of original entry:

- The books in which the transactions are first of all recorded from voucher or source document is called as books of original entry.

- A small business (where number of transactions is less) prepares a Journal where all the transactions are recorded in chronological (day to day) manner on the principle of double entry system.

- When the business grows it prepares separate books for original entry which is called as subsidiary books like cash book (records all cash receipts and payments), purchase book (records all credit purchases), sales book(for all credit sales), purchase return book, sales return book.

 iv. Posting to ledger

- Grouping similar nature of items at one place under their respective accounts is called as ledger. 

- A separate account is prepared for every person, assets, liabilities, expenses and incomes on basis of all transactions.

- In ledger a separate account is prepared for their names like salary account, wages account, rent account etc.

v. Preparation of trial balance and financial statements

- Last step in the accounting process is the balancing of ledger accounts and preparation of Trial balance with such balances.

- Trial balance is a statement which is prepared with the debit and credit balances of ledger to check the  arithmetical accuracy of books of accounts.

- On the basis of trial balance financial statements namely Trading and Profit & loss account for finding the profit and loss and balance sheet to ascertain the financial position of the business are prepared.

Basis of accounting

1. Cash basis of accounting:

- This basis records only the cash transactions and credit transaction are not recorded till the cash is paid or received for it,

- Incomes are recorded when they are received n cash and expenses are recorded when they are paid in cash.

- Profit is the difference between the actual cash receipts and cash payments(receipts and payments account is prepared)

- It is suitable for professionals like doctors, lawyers etc.

Advantages

i. Simple, realistic and satisfies conservative instinct people of many people.

ii. it does not require use of personal judgments and estimates.

iii. Suitable only for those enterprises where all the transactions are in cash.

Disadvantages

i. It does not give a true and fair position of the business.

ii. It does not follow the matching principle.

iii. Companies act, 1956 does not recognize it.

2. Accrual basis of accounting

- This basis records all the credit and cash basis transactions.

- Incomes are recorded when they are earned whether the cash is received or not and similarly the expenses are recorded when they are incurred or become due and whether the cash is paid for them or not.

- Profit or loss is the result of difference between incomes earned and expenses incurred.

- This basis makes into consideration the outstanding expenses, prepaid expenses, accrued incomes and unearned incomes.

Advantages

i. It follows the matching principle.

ii. Companies act, 1956 recognize it.

iii. It gives a true and fair position of the business.

Disadvantages

i. It is not Simple & realistic.

ii. It requires use of personal judgments and estimates.

Mixed and hybrid basis of accounting

- Mixture of cash and accrual basis of accounting.

- Revenue and assets are recorded on cash basis.

- Expenses and liabilities are recorded on accrual basis of accounting.