The Accounting Process (Cambridge International AS Accounting)

The accounting process

What is the accounting process?

• Stage 1: Transaction

  • A transaction takes place

  • Examples include:

    • The sale or purchase of goods, a service or an asset
    • Withdrawing or depositing cash
    • Paying an expense or receiving income

• Stage 2: Business document

  • A business document is issued or received
  • This is a record of the transaction

• Stage 3: Book of prime entry

  • The amount is entered into a book of prime entry
  • This collates the different types of transactions

• Stage 4: Ledger account

  • The entries from the books of prime entry are entered into the ledger accounts
  • These are part of the double-entry accounting system

The accounting process

Exam Hint The aim of the accounting process is to have the information in the ledger accounts so that financial statements can be produced at the end of the accounting period.

Financial statements

Spec point — 3.1.1

What are financial statements?

• Financial statements are produced each year

• They show a summary of the business activity during the year

• The financial statements that most businesses produce are:

  • statement of profit or loss
  • statement of financial position

What is a statement of profit or loss?

• An accountant prepares a **statement of profit or loss for a business **to measure the profit or a loss

• The** profit or loss** is the difference between the total income and the total expenses

  • A profit is made if the income is higher than the expenses
  • A loss is made if the income is lower than the expenses

• It can also show the gross profit for a trading business

  • This is the profit from trading activities
  • Gross profit = revenue - cost of sales

• It is important to produce a statement of profit or loss to measure the performance and profitability of a business

• It can be used to monitor the progress of the business

  • If a profit is made, the owner is making money on their investment
  • If a loss is made, the owner might have to make changes to the business

What is a statement of financial position?

• An accountant prepares a statement of financial position to show the current values of the

  • assets
  • liabilities
  • capital or equity

• It can be used to calculate the working capital

  • This is the amount of money a business would have left if it converted all of its current assets into cash and paid off its current liabilities
  • Working capital = current assets - current liabilities

• It is important to produce a statement of financial position to measure the liquidity of a business

• It can be used to make decisions about the business

  • If there is a lot of cash, then the business might decide to purchase more non-current assets