Step – 1 ( Accepting Source Documents )
In the normal course of business, a document is produced each time a transaction occurs.
1. Sales and purchases usually have invoices or receipts.
2. Deposit slips are produced when lodgements (deposits) are made to a bank account.
3. Cheques are written to pay money out of the account.
Bookkeeping involves recording the details of all of these source documents into multi-column journals (also known as a books of first entry or daybooks). For example, all credit sales are recorded in the Sales Journal, all Cash Payments are recorded in the Cash Payments Journal. Columns in the journal normally correspond to an account.
Step – 2 ( Posting )
After a certain period, typically a month, the columns in each journal are each totalled to give a summary for the period. These journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. The process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the “T” format undergo balancing, which is simply a process to arrive at the balance of the account.
Step – 3 ( Arithmetic Check )
To quickly check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totalled and then the credit column is totalled. The two totals must agree – If the two totals do not agree, an error has been made in either the journals or made during the posting process. The error must be located and rectified and the totals of debit column and credit column re-calculated to check for agreement before any further processing can take place.
Step – 4 ( Non-cash Adjustments )
Once there are no errors, the accountant produces a number of adjustments and changes the balance amounts of some of the accounts. For example, the “Inventory” account asset account is changed to bring them into line with the actual numbers counted during a stock take. At the same time, the expense account associated with usage of inventory is adjusted. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called the adjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements.
Step – 5 ( Prepare Financial Statements )
Finally financial statements are drawn from the trial balance, which may include:
the income statement, also known as the statement of financial results, profit and loss account, or P&L
the balance sheet, also known as the statement of financial position
the cash flow statement
the statement of retained earnings, also known as the statement of total recognised gains and losses or statement of changes in equity
Step – 6 ( Client Approval )
The financial statements are presented to the client for approval. Chances are that the client has missed out a few vouchers, bills etc which he might later provide. On providing additional source documents, the entries for these transactions are passed and a final approval is taken.
Step – 7 ( Reconciling Bank Statements )
Once the final statement is drawn, The Bank Ledger is compared to the Statement from the Bank and a Bank Reconciliation Statement is drawn. This brings to light Bank charges and other expenses which have been charged to the Bank account directly. The accountant passes journal entries to record the missed out transactions.
Step – 8 ( Tax Return Preparation )
After the Bank is reconciled, Relevant Tax Statements are prepared. For business which sells products, A VAT return is prepared. For Business which sells services, A Service Tax Return is prepared. This apart returns on T.D.S, F.B.T and Income Tax are also prepared.
Step – 9 ( Invoicing )
After filing Tax Returns, A backup of the account is taken and the books of accounts are printed from our office. The client is given an Invoice along with the Books are Fees is collected.