Final » Accounts/Accounting
» Final Accounts/Accounting
In its simplest sense, final accounts/accounting should be understood as the accounting activity that is carried on generally towards the end of a period called accounting period.
Basic Purpose of Accounting
The basic purpose of accounting is derivation of information. The double entry system of accounting enables an organisation to derive the information that it needs in relation to accounting elements called account heads or ledger accounts. This double entry system of accounting, enables the collection of all the information relating to an element (account) at a single place.
The organisation's informational need defines the elements in the accounting system of the organisation. The more the information needed by the organisation the more the elements (accounting heads) that are to be maintained by the organisations'.
Journal (Recording) » Ledger (Posting) : Regular Tasks
The place where the information relating to an element is collected/available is a Ledger. Each accounting element has a specific identity in the ledger and is known as a ledger account.
Every Ledger posting should have a journal support i.e. the information flows into the ledger from/through a journal. There is no ledger without a journal.
Recording the accounting transactions into the journal and posting them into the ledger form the core tasks carried on regularly in relation to the accounting process. However these are not the only tasks that exist in relation to an accounting system/process.
Tasks Involved in the accounting process
Including the tasks of recording the transactions and posting them into the ledger, these are the tasks that we generally come across and assume to be the tasks involved in accounting.
• Creating a Proof of the Transaction
Whenever a transaction takes place in an organisation, more so, in the case of transactions relevant to accounting, a proof is created in the form of either a voucher or a receipt or an invoice or any other document that gives the details relating to the transaction.
Strictly speaking, this task is not a part of the accounting process. It is only a task which would enable the accomplishment of the accounting process or tasks.
• Actual Accounting Tasks
The first accounting task is "Preparing the Journal based on the proof of the transaction". This is called Recording the transaction.
The second accounting task is "Preparing the Ledger based on the information in the Journal". This is called Posting the Journal Entry into the Ledger.
» Preparing a Trial Balance
Preparing a trial balance is one other task that we come across in accounting. A trial balance is a statement of ledger account balances as at a particular instance. It can be prepared at any instance as and when needed. It is a statement and not a ledger account.
A Trial Balance is prepared to check the mathematical/arithmetic accuracy of accounting. This is the main and most important purpose of preparation of the Trial Balance and nothing else.
However, since it is anyhow prepared for an important purpose, it is used for other purposes wherever possible. Just because it is being used for other purposes (like in the preparation of final accounts), we cannot say that the trial balance is prepared for those other purposes.
• Trial Balance » Not a part of the actual Accounting Process!!
True, the trial balance enables the organisation to ensure the mathematical/arithmetic accuracy of accounting. However, preparation of a Trial Balance is not a necessity, unlike the Journal and the Ledger.
The Ledger gives the information that we need and we cannot prepare a ledger without a journal (No Journal No Ledger). But, we can think of the existence of the accounting system and process without the trial balance.
Additional Information Needed by the Organisation
Apart from the information relating to the various elements (ledger accounts) that an organisation collects, there is other information that is needed by the organisation. In general, in accounting we can identify two important pieces of information that the organisation needs.
The ledger accounts collect information relating to each element. All the elements (account heads) are classified into three types. Personal accounts (relating to persons and organisations), Real accounts (relating to tangible aspects) and Nominal accounts (relating to incomes/gains and expenses/losses).
• Profits made by the organisation
As and when an element is effected by a transaction, the ledger account is posted to with the information. This keeps on happening continuously. The information thus collected in the form of ledger accounts does not say anything about the profits made by the organisation.
The organisation periodically would be interested in knowing the amount of profit that it has made over the period.
» Involvement of a Period
When it comes to thinking about profits there is a period involved in the thought. We think of profits made over a period and not at a particular instance.
For example, We think of Profits made
• Position of the Organisation
The ledger accounts are periodically balanced to obtain the balances in the accounts.
The act of balancing is done at such periods as is needed by the organisation. For example, where the organisation needs the information relating to cash balance daily, therefore Cash a/c is balanced daily.
» Assets and Liabilities indicate a persons Position
What is it that comes to our mind when we think of a persons position? It is the value of his/her property and the liabilities he/she has.
Even in accounting, in trying to ascertain the position of a business entity, this is what we think of. The position of a business is indicated by the value of its assets and liabilities.
The organisation at times would be interested in knowing its position as at a particular point of time.
» Position at an instance
When it comes to thinking about the position there is an instance involved in the thought. We think of the position as at a point of time and not a period.
For example, We think of the position
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