The accounting process is a systematic series of steps that companies follow to identify, record,
and report financial information. It ensures that financial transactions are accurately captured
and financial statements are prepared in a reliable and standardized manner.
Key Steps in the Accounting Process:
1. Identification and Analysis
o Recognize economic events or transactions that affect the business.
o Example: Purchasing inventory, earning revenue from sales, or paying salaries.
2. Recording (Journalizing)
o Record the transactions in the company’s journal using the double-entry
accounting system.
o Example: If a business buys office supplies for cash, you would record a debit to
the office supplies account and a credit to cash.
3. Posting
o Transfer the information from the journal to the general ledger, where all
individual accounts are maintained.
o Example: Posting the office supplies expense from the journal to the general
ledger under “Office Supplies Expense.”
4. Unadjusted Trial Balance
o Prepare a trial balance to check if the debits and credits are balanced.
o Example: A list that includes all account balances like cash, accounts receivable,
and liabilities, ensuring total debits equal total credits.
5. Adjusting Entries
o Make adjustments for accrued and deferred items to ensure the financial
statements reflect the correct accounting period.
o Example: Adjust for accrued expenses, such as interest owed but not yet paid.
6. Adjusted Trial Balance
o Prepare another trial balance after adjusting entries to confirm that debits still
equal credits.
7. Financial Statement Preparation
o Use the adjusted trial balance to prepare the financial statements:
Income Statement (shows profit or loss)
Balance Sheet (shows financial position)
Cash Flow Statement (shows cash inflows and outflows)
o Example: An income statement shows total revenue minus total expenses,
resulting in net profit.
8. Closing Entries
o Close temporary accounts (like revenues and expenses) to retain earnings for the
next accounting period.
o Example: Transferring net income to the retained earnings account.
9. Post-Closing Trial Balance
o Prepare a final trial balance to ensure all accounts are ready for the next
accounting cycle.
o Example: Only permanent accounts like assets, liabilities, and equity remain.
10. Reversing Entries (Optional)
o Reverse certain entries made in the previous period to simplify future recording.
o Example: Reversing an accrued salary expense recorded at year-end.
Example Scenario:
Transaction: A company receives $1,000 for services provided.
o Journal Entry: Debit Cash $1,000, Credit Service Revenue $1,000.
Transaction: The company pays $300 in rent.
o Journal Entry: Debit Rent Expense $300, Credit Cash $300.
The accounting process ensures all financial transactions are captured systematically, leading to
accurate and complete financial reporting.
