Question

Discuss the importance of the recording process and the value it provides for an active business.

Answer 1

Accounting is the process of systematically recording, measuring, and communicating information about financial transactions.

In layman term “Accounting is a process of recording, summarizing, analyzing and recording of financial transactions of an enterprise.” Accounting is one of the most important functions of any business enterprise. It is often referred to as “Language of Business”.

In order to put together all of the accounting and bookkeeping elements a company will do, and understand how all of these elements work together--we need to understand the actual bookkeeping process; that is, the exact mechanical process to keep sales, expenses, revenue, and income documented in all the right places so that we can provide accurate financial statements in a timely manner.

At the heart of accounting is the double-entry bookkeeping method. This involves making at least two recording entries for every transaction: a debit in one account and a credit in another account. The method helps prevent errors because the sum of the debits should equal the sum of the credits.

The three major statements which is generated by Business accounting system are as follows:

1. Profit & Loss Account (Income Statement) –

Income statement shows the net income generated/net loss incurred by an enterprise during a particular accounting period.

2. Balance Sheet or Statement of financial position –

Balance sheet statement shows the financial position of an enterprise as on particular date. Closing balance of various assets and liabilities are reported in balance sheet. The excess of assets over liabilities is capital.

3. Cash Flow Statement –

Cash Flow Statement shows how changes in balance sheet and income statement which affect cash and cash equivalent. Basically it shows cash inflows and outflows among operating, investing and financial activities of an enterprise.

These three statements when combined together forms Financial Statements . The financial statements are required by all the stakeholders.

Disclosure notes and Statement of changes in equity is also prepared.