In this tutorial, we will learn about the procedural aspects of accounting, which divided into generating financial information and using the financial report.
The first two procedural stages of generating financial information and the preparation of trial balance covered under bookkeeping. In contrast, the development of financial statements and its analysis, interpretation, and communication with various users considered as accounting stages.
Based on the above definitions, the procedure of accounting can divide into two parts:
- Generating financial information
- They are using the financial report.
- Generating Financial Information
It’s the primary function of accounting. All business transactions having a financial character or say which are in terms of money are to be evidenced by some documents; for example, sales recorded in the sales book and purchases are to log in the purchase book. Primarily recording is done in the journal, which further divided into several subsidiary books according to the size and nature of the business carried by the firm.
It’s the systematic analysis of the recorded data by putting transactions of the same nature in one place so that the information is compact and easy to understand. The book containing classified information is a ledger. It has different pages for different accounts; for example, there may be separate accounts for Sales, Purchases, Rent, Repairs, etc. It helps to find the amount of expenditure incurred over each head.
It’s concerned with the presentation of the detailed data in a manner that is useful to the internal and external users of the firm. It leads to the preparation of the Trial balance, Profit & Loss Account, Balance Sheet, and Cash-Flow Statement.
It’s concerned with the systematic classification of data in the financial statements. They simplify the data summarized so that they are easy to understand. For example, they are putting all fixed assets at one place and current holdings in one place so that it is easy to analyze the portion of fixed and existing assets in the firm.
The accounting finally ends after interpreting the actual meaning and significance of the analyzed data. It is explained so that the external or third-party users of the accounts or potential investors can make a judgment.
It’s concerned with the transmission of the summarized, analyzed, and interpreted information to end-users so that they can make rational decisions.
P.S The first two procedural stages of the process of generating financial information along with the preparation of trial balance are part of book-keeping.
And the other stages, including Interpreting, communicating is covered in Accounting.
Using financial information
In earlier times, it considered that accounting is to be done only for the business and the proprietor, but changing social relationships diluted the more initial thinking. It’s now believed that besides the owner or the management, the users of the accounts such as potential investors, money lenders, customers, government, and other such agencies must be communicated well with the financial information of the business.
But, as the other users might not be aware of accounting technicalities, the information is supposed not to be stressful so that that layman couldn’t understand. The information should also be free from biases. The users of accounts should understand not only the financial results depicted by accounting figures but also should be able to assess it’s reliability and compare it with the other alternative opportunities and the experience.
Now, who are those users?
They can categorize as
- Internal Users such as Employees, Managers, Board of Directors, Officers, Partners, etc.
- External Users such as Government, Lenders, Suppliers, Potential Investors, etc.