Accounting is an ancient practice dating back to ancient times when people bartered for goods. The concept of money did not exist then. It was only after people realized the value of money that companies started to keep account books. They had to note down how much for what and maintain this information for future reference along with the list of goods on hand. Eventually, each company evolved its own system of recording transactions and maintaining accounts. The person responsible for this was called an accountant!
The profession of accounting has certainly come a long way since then. It’s not just about jotting down numbers today! Now, accountants perform many roles like managing budgets, preparing tax returns, or advising on stocks. Even if you are not pursuing this noble profession yourself; it’ll definitely help if you know how it works at least in theory (and let’s face it- you’re curious!).
Read on to find out how it all works! – Aron Govil
- The first step is obviously to record transactions. The company’s financial transactions are recorded in what is known as the “Books of Accounts” or “Ledger”. This includes all the information about who owes money to whom, how much profit or loss was incurred by selling products or services, etc. For this purpose there are two types of books- one for recording Income and Expenses (known as Profit & Loss Account) and other for recording Assets, Liabilities and Capital (known as Balance Sheet).
- Every transaction has a unique reference number given called an ‘Account Number’. This helps keep track of each transaction separately so that they can be clearly identified later if necessary. Next comes the process of ‘Trial Balance’. This is where the total of all Income, Expenses and Capital are recorded to verify if they match with each other (because it’s possible that sometimes the books might be misplaced or lost!).
- Aron Govil says Most companies use computerized bookkeeping systems today. The transactions which are executed by employees at their desks are entered into the system via an interface using unique password-protected logins. Transactions like receiving payment or crediting a customer’s account are done directly through this interface. Other transactions like recording purchases, selling products, paying salaries etc., require certain data to be entered before you execute them. These include Sales Register, Purchase Register, Petty Cash Book, and Employees’ Pay Slips etc. However these days most companies opt for Cloud Accounting Software which allows them to record transactions directly in the cloud.
- Once all data has been entered, it’s time to verify if everything is shown correctly. This verification process is called ‘Data Entry Check’ or sometimes known as ‘Posting’. All transaction details are compared with each other and corrected if needed before finally being recorded into the books of accounts (either manually or via computerized bookkeeping system). However, that’s not the end! After recording transactions you need to prepare reports based on this information for decision makers like managers. Reports come in different forms depending on who needs them and what info is required by them. For example- Sales Report, Inventory List , Expense Breakup Report etc., Lists of all financial transactions for a particular time period are prepared and presented to managers. These reports contain summarized information about all transactions taking place in the company so that managers can get an idea about whether business is on track or not.
- When you look at it closely, accountants play a very important role in today’s business world! Without them, how will businesses keep track of their financial records? How do they check if money is being used properly? Who keeps track of salaries getting paid, deals made etc.? The job of an accountant may involve mind-numbing data entry work but it surely isn’t easy! So next time someone tells you that they want to be an ‘Accountant’, make sure you give them due credit for this noble profession.
Accountants supervise the financial transactions taking place in a business to ensure that things are running smoothly. They record these transactions, prepare reports and then present them to managers for necessary decision making.
The next step is verification of all recorded data (known as ‘Data Entry Check’ or ‘Posting’). Finally, reports based on summarized information of all transactions are prepared and presented to managers for decision making.