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Date: 18.07.2009

Accounting conventions & accounting process:

Accounting convention:

1. Double-entry book-keeping one account is debited and the second account is credited

2. Sum of debits = sum of credits

3. Based on funds flow principle, any transaction bringing in funds transaction is credited and the

transaction taking funds out is debited

4. A business enterprise has income, expense, assets and liabilities

5. Sum of assets = sum of liabilities

6. Income and expenses are a part of Profit and loss account while assets and liabilities form a part

of balance sheet

7. These two are the financial statements arising out of financial accounting, usually prepared at the

end of the accounting period

Accounting process = sequential steps involved in financial accounting

Accounting Process

Financial transaction takesplace in the Enterprise it

could be cash or on credit if it is Cash, it could resultin cash inflow or outflow

Decide on which Account to bedebited or credited in accordance with

Accounting principles & theRelevant Rules & Regulations

Transactions are

maintained in ledgers Creditors, debtors etc.

and Registers Sales,Purchases etc. on

individual transactionbasis

Transactions are consolidated in acontrol book of accounts namedGeneral Ledger this contains a

single consolidated account for each

item of income, expense, asset and

liability example, one account for

operating income, one debtors

account, one creditors account etc.

Verification step whether the sum of all credits is equalto sum of all debits as it should be in case the business

enterprise is following double-entry book-keeping systemalso known as Accrual Accounting System

This is done by extracting all the balances of GeneralLedger in a statement known as Trial Balances. In this

statement, the income and liabilities will appear underCredit side while assets and expenses will appear underDebit side. This statement will however disclose errorsof some types like wrong head of accounting, error of

omission or commission on both the sides to the sameextent. Example customer debited for credit sale byRs.10,000/- more and sales also credited by Rs.10,000/-more.

Process of rectification of errors pointed out by the Trial

Balance statement. Further where the errors are not shownby the Trial Balance, the process of reconciliation isinitiated especially in the case of creditors, debtors and

bank accounts. This is done by asking for statements of

our accounts with them so that we can go through entryby entry and verify whether the entries are correct or not.If there is a mistake correction is carried out

Closing entries are then made

depreciation on fixed assets, provisionfor bad and doubtful debts, provision foroutstanding expenses, outstandingincome, adjustment for pre-paid

expenses and income received inadvance etc. are made before

preparation of final financial statementsfor the accounting year, namely Profit &

Loss statement & Balance Sheet

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Step no. 1 Accounting transaction analysis and deciding which

Account to be debited and which account to be credited

Step no. 2 Entering the various transactions in the basic books ofAccounts Registers and ledgers excluding General Ledger

Step no. 3 Posting the consolidated figures each account-wise in the

Control book called General Ledger

Step no. 4 Verification of the double-entry bookkeeping process

Through Trial Balance

Step no. 5 Rectification of errors pointed out by Trial Balance

Step no. 6 Closing and adjustment entries at the end of the Accounting period

Step no. 7 Preparation of Profit & Loss Statement and Balance Sheet as per prescribed formats in thecase of limited companies as per Schedule VI of the Companies Act

Profit & Loss statement and Balance

sheet are prepared in the case ofproprietorship firms and partnershipfirms, the two statements can be

prepared in any format whereas in the

case of limited companies, the businessenterprise has to prepare in accordance

with the formats provided for inSchedule VI of The Companies Act