Basic Phases of Accounting

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Basic Phases of Accounting

There are four basic phases of accounting: recording, classifying, summarising and interpreting

financial data. Communication may not be formally considered one of the accounting phases,

but it is a crucial step as well. All accounting information should be communicated properly tothe appropriate parties after analyzing. Accounting reports must be prepared and distributed,

and should include the basic income statement and balance sheet, as well as additional

information including accounting ratios, diagrams, graphs and funds flow statements.

1) Recording:

Recording is a basic phase of accounting that is also known as bookkeeping. In this phase, all

financial transactions are recorded in a systematical and chronological manner in the

appropriate books or databases. Accounting recorders are the documents and books inoled in

preparing financial statements. Accounting recorders include records of assets, liabilities,

ledgers, !ournals and other supporting documents such as inoices and checks.

2) Classifying:

The classifying phase of accounting inoles sorting and grouping similar items under the

designated name, category or account. This phase uses systematic analysis of recorded data in

which all transactions are grouped in one place. "or e#ample, $trael e#penses$ might be a

category that accountants use to classify e#penses relating to company trael. The term

$ledger$ refers to the book in which classifications are recorded.

3) Summarising:

The summarising phase of accounting inoles summarising the data after each accounting

period, such as a month, %uarter or year. The data must be presented in a manner which is

easy to understand and use by both e#ternal and internal users of the accounting statements.

&raphs and other isual elements are often used to complement the te#t data.

4) Interreting:

The interpreting phase of the accounting process in concerned with analyzing financial data,and is a critical tool for decision'making. This final function interprets the recorded data in a

manner which allows end'users to make meaningful !udgments regarding the financial

conditions of a business or personal account, as well as the profitability of business operations.

This data is then used to prepare future plans and frame policies to e#ecute financial plans.

!eatures of Accounting:


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An analysis of the definitions of accounting brings out the following as features of accounting:

1) Accounting is an art:

Accounting is considered as an art because it re%uires the application of some special

knowledge comprising of some accepted theories and principles.

2) Identification of financial e"ents:

In course of daily actiities, a number of eents take place. Accounting is concerned with

only those eents which are of financial nature. These eents are termed as economic

actiities. In other words, only those eents which can be measured in terms of money,

called business transactions and are identified for the purpose of recording.

3) Recording of #usiness transactions:

(nly the business transactions are recorded according to some specified rules in the books

of accounts. )ooks of accounts to be maintained depend on the nature and size of the

business. (nly those transactions and eents which are of a financial character are

recorded in accounting. There are a number of eents in the business which are ery

important for business but which cannot be measured and, e#pressed in terms of money

and hence such transactions will not be recorded. "or e#ample, the %uarrel between the

*roduction +anager and the ales +anager, resignation by an able and e#perienced

manager, strike by employees and starting of a new business by the other competitor etc.

Though these eents affect the earnings of the business adersely but as not one can

measure the effect of such eents in terms of money, these will not be recorded in the books

of the business.

4) Classifying the #usiness transactions:

Classification is the process of grouping the transactions or entries of the same type or

similar nature in one place. This is done by opening accounts in the ledger. In the ledger,

the transaction inoling a particular account is recorded in that account only.


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$) Summarising the information:

ummarising inoles the preparation of reports and statements from the classified data

-ledger in a manner understandable to the user of accounting information. This inoles the

balancing of ledger accounts and the preparation of Trial )alance with the help of such

balances. "inal Accounts, which include Trading and *rofit / 0oss Account and a )alance

heet, are prepared with the help of Trial )alance.

%) Recording in terms of money:

1ach and eery transaction is recorded in the books of account in terms of money only. "or

e#ample, if a businessman purchases 23 Chairs and 4 Tables, their alues in terms of

money will be recorded in the books. imilarly, if a business possesses Rs. 4,333 in Cash5

0and measuring 6,333 %uare +eters5 7 +achines5 4 ton of raw materials5 23 Chairs5 4

Tables, and so on, then in the absence of money measurement these different types of

assets cannot be added up and hence cannot gie any useful information. )it if they are

e#pressed in terms of money, they will immediately proide useful information such as,

Cash Rs. 4,3335 0and Rs. 83,3335 Trucks Rs. 7,33,3335 +achines Rs. 93,3335 &oods Rs.

3,3335 "urniture Rs. 73,333 -23 chairs and 4 tables together.

&) Interretation of the results :

In Accounting, the results of the business are presented in such a manner -i.e., by preparing

Trading and *rofit / 0oss Account and )alance heet that the arious parties interested in

the business such as proprietors, managers, employees, bank, creditors, etc. can hae full

information about the profitability and the financial position of the business.

'#(ecti"esof Accounting:

The following are the main ob!ecties or functions or utilities of accounting:

1) o *ee Systematic Record of Business ransactions :

The main ob!ectie of accounting is to keep a complete record of business transactions of

the entity. This record is re%uired to be maintained according to specified principles and

rules. ;eeping of complete record of business transactions helps to aoid the possibility of


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omission and fraud. "or this purpose, all the business transactions are recorded first in


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All financial transactions are recorded in a systematic manner in the books of accounts so

that there is no need to depend upon on memory. It is impossible to remember the business

transactions which hae grown in size and comple#ity.

2) Prearation of !inancial Statements:

*roper recording of transactions facilitates the preparation of financial statements i.e. the

trading and profit and loss account and balance sheet.

3) Comarison of Results:

Accounting information when properly recorded can be used to compare the results of one

year with those of earlier years so that the significant changes can be analyzed.

4) -ecision ,a.ing:

Accounting information helps the management to plan its future actiities by preparing

budgets and coordination of arious actiities in different departments.

$) /"idence in 0egal ,atters:

*roperly recorded accounting information can be produced as eidence ina court of law.

%) Pro"ides Information to Interested Parties:

Interested parties like owners, creditors, management, employees, customers, goernment,

etc. can get financial information about the organisation.

&) els in aation ,atters:

Income ta# and sales ta# authorities depend on the accounts maintained by the business

ta#ation matters.

) +aluation of Business:

?hen the business is to be sold, the accounting information can be utilized to determine the

proper alue of business.

0imitations of Accounting:

The following are the limitations of accounting:


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1) Accounting information is eressed in terms of money:

The accountant measures only those eents that are of financial nature i.e. capable of being

e#pressed in terms of money. @on'monetary items or eents are not measured and

recorded in accounting.

2) Accounting information is #ased on estimates:

ome accounting data are based on estimates and estimates may be inaccurate.

3) Accounting information may #e #iased:

Accounting information is not without personal influence or bias of the accountant. In

measuring income, accountant applies a choice between different methods of inentory

aluation, deprecation methods, treatment of capital and reenue items etc. ence, due to

lack of ob!ectiity income arried at may not be correct in certain cases.

4) !ied assets are recorded at the original cost:

The alue may of fi#ed assets change oer time and so there may be a great difference

between the original cost and current replacement cost. )alance sheet may not show true

and fair iew of the financial position on a particular date.

$) Accounting can #e maniulated:

Accounting information may not be used as the only test of managerial performance as

profits can be manipulated or misrepresented.

%) ,oney as a measurement unit changes in "alue:

The alue of money does not remain stable. Bnless price leel changes are considered in

measurement of income, the accounting information will not show true financial results.

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Basic Phases of Accounting