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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 to the 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 in ol ed in preparing financial statements. Accounting recorders include records of assets, liabilities, ledgers, !ournals and other supporting documents such as in oices and checks. 2) Classifying: The classifying phase of accounting in ol es 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, $tra el e#penses$ might be a category that accountants use to classify e#penses relating to company tra el. The term $ledger$ refers to the book in which classifications are recorded. 3) Summarising: The summarising phase of accounting in ol es 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) Inter reting: 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:

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 acti ities, a number of e ents take place. Accounting is concerned with only those e ents which are of financial nature. These e ents are termed as economic acti ities. In other words, only those e ents 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 e ents which are of a financial character are recorded in accounting. There are a number of e ents 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 e ents affect the earnings of the business ad ersely but as not one can measure the effect of such e ents 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 in ol ing a particular account is recorded in that account only.

$) Summarising the information: ,ummarising in ol es the preparation of reports and statements from the classified data -ledger. in a manner understandable to the user of accounting information. This in ol es 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 e ery 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 gi e any useful information. )it if they are e#pressed in terms of money, they will immediately pro ide 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.. &) Inter retation 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 ha e full information about the profitability and the financial position of the business.

'#(ecti"es of Accounting: The following are the main ob!ecti es or functions or utilities of accounting: 1) )o *ee Systematic Record of Business )ransactions : The main ob!ecti e 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 a oid the possibility of

omission and fraud. "or this purpose, all the business transactions are recorded first in <ournal or ,pecial *urpose )ooks and then posted into 0edger. 2) )o Ascertain the Result of ' eration: Another ob!ecti e of accounting is to ascertain the result of operation carried on by the business during an accounting period. The result of operation may be either profit earned or loss suffered. A Trading and *rofit / 0oss Account of the business is prepared at the end of each accounting period to ascertain profit or loss. In the profit and loss account, the re enue of the business is matched with the e#penses incurred. 3) )o Ascertain the !inancial Position of the Business : The financial position of the business is ascertained by preparing a statement called )alance ,heet. In this statement, the alues of all the assets and liabilities of the business are shown. "or a businessman, merely ascertaining the profit or loss of the business in not enough, he must also know the financial health of the business. "or this purpose, after preparing the *rofit / 0oss Account a statement called =)alance ,heet> is prepared which shows the assets and their alues on the one hand and the liabilities and capital on the other. 4) )o Pro"ide Information to +arious Parties : Another main ob!ecti e of accounting is to communicate the accounting information to arious interested parties like owners, in estors, creditors, banks, employees and go ernment authorities etc. This information helps them in taking sound and !udicious decisions about the business entity.

Ad"antages of Accounting : The following are the ad antages of accounting: 1) ,aintenance of Business Records:

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 ha e grown in size and comple#ity. 2) Pre aration 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) Com arison 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 acti ities by preparing budgets and coordination of arious acti ities in different departments. $) /"idence in 0egal ,atters: *roperly recorded accounting information can be produced as e idence ina court of law. %) Pro"ides Information to Interested Parties: Interested parties like owners, creditors, management, employees, customers, go ernment, etc. can get financial information about the organisation. &) 1el s in )a2ation ,atters: Income ta# and sales ta# authorities depend on the accounts maintained by the business ta#ation matters. 3) +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:

1) Accounting information is e2 ressed in terms of money: The accountant measures only those e ents that are of financial nature i.e. capable of being e#pressed in terms of money. @on'monetary items or e ents 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 in entory aluation, deprecation methods, treatment of capital and re enue items etc. Aence, due to lack of ob!ecti ity income arri ed at may not be correct in certain cases. 4) !i2ed assets are recorded at the original cost: The alue may of fi#ed assets change o er 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 mani ulated: 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 le el changes are considered in measurement of income, the accounting information will not show true financial results.