The Accounting Process

Accounting is a process

Accounting is a process in which money transactions are recorded, summarised and analysed so as to produce information for a variety of purposes.

That sounds a pretty boring explanation so let's try again.

Imagine that you are running your own business and you need to know how your business is doing. You would likely want answers to questions such as:

Is business making any profit?
Have I got enough money to pay my bills?
Who owes me money?
How much is my business worth?

In order to answer these important questions, you need to make sense of the hundreds, if not thousands, maybe even hundreds of thousands of financial transactions that might occur every year in regard to your business.

Purpose of the accounting process

Accounting is a process that sets out to make sense of the everyday financial transactions that a business will encounter. This process deals with the constant stream of paperwork that usually accompanies every financial transaction, for example invoices received from suppliers for goods the business has bought. The accounting process continually captures information from each financial transaction and stores it in a database. This allows the information to be analysed, categorised, summarised and simplified so that the business owners and/or managers can:

Making decisions about the business
Track and keep control of money
Ensure the business remains solvent
Manage the financial risks of the business
Produce financial reports for shareholders and otehr stakeholders in the business
Provide information to the Taxation Office

Importance of the accounting process

Accounting is a vital and necessary process for businesses and individuals. It is not everyone's idea of great fun, but without accounting the world as we know it, would not exist. The birth of capitalism owes its existence to accounting.

When businesses fail to administer proper accounting processes it is usual to find that the business does not survive. Furthermore, when accounting processes fail it is not uncommon to find that businesses will become embroiled in law suits.