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 takes
place in the Enterprise – it
could be cash or on credit –
if it is Cash, it could result
in cash inflow or outflow
Transactions are
Decide on which Account to be maintained in ledgers –
debited or credited in accordance with Creditors’, debtors’ etc.
‘Accounting principles’ & the and Registers – Sales,
Relevant Rules & Regulations Purchases etc. on
individual transaction
basis

Verification step – whether the sum of all credits is equal Transactions are consolidated in a
to sum of all debits as it should be in case the business control book of accounts named
enterprise is following double-entry book-keeping system “General Ledger” – this contains a
also known as Accrual Accounting System single consolidated account for each
This is done by extracting all the balances of General item of income, expense, asset and
Ledger in a statement known as “Trial Balances”. In this
liability – example, one account for
statement, the income and liabilities will appear under
“Credit” side while assets and expenses will appear under operating income, one debtors
“Debit” side. This statement will however disclose errors account, one creditors account etc.
of some types like wrong head of accounting, error of
omission or commission on both the sides to the same
extent. Example customer debited for credit sale by
Rs.10,000/- more and sales also credited by Rs.10,000/-
more.

Process of rectification of errors pointed out by the Trial Closing entries are then made –
Balance statement. Further where the errors are not shown depreciation on fixed assets, provision
by the Trial Balance, the process of reconciliation is for bad and doubtful debts, provision for
initiated especially in the case of creditors, debtors and outstanding expenses, outstanding
bank accounts. This is done by asking for statements of income, adjustment for pre-paid
our accounts with them so that we can go through entry expenses and income received in
by entry and verify whether the entries are correct or not. advance etc. are made before
If there is a mistake correction is carried out preparation of final financial statements
for the accounting year, namely Profit &
Loss statement & Balance Sheet
Step no. 1 – Accounting transaction analysis and deciding which Profit & Loss statement and Balance
sheet are prepared – in the case of
Account to be debited and which account to be credited
proprietorship firms and partnership
Step no. 2 – Entering the various transactions in the basic books of firms, the two statements can be
prepared in any format whereas in the
Accounts – Registers and ledgers excluding General Ledger case of limited companies, the business
Step no. 3 – Posting the consolidated figures each account-wise in the enterprise has to prepare in accordance
with the formats provided for in
Control book called General Ledger Schedule VI of The Companies’ Act

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 the
case of limited companies as per Schedule VI of the Companies’ Act