These include assets, liabilities, capital, expenses/losses and income/gains. Īll accounts are divided into five categories in order to record business transactions. Usually, accounts are opened in the order in which they appear in the profit and loss account and balance sheet. Furthermore, all the transactions pertaining to the account are recorded collectively in the account itself.Īdditionally, the accounts in ledger are opened in specific order to make posting and locating the transactions easily. This is because the aggregate result of all transactions pertaining to a particular account can only be known through ledger.Įach account is opened separately in a ledger. It is one of the most important books of accounting for a business. General Ledger consists of numerous accounts in which transactions pertaining to these accounts are recorded.īasically, all the accounts involved in the journal entries form part of ledger. Whereas, journal is the original book of entry. Ledger is the principal book of accounting system. The second stage in the accounting cycle is posting entries from journal to the ledger account. So, these series of steps or stages are what constitute Accounting Cycle. Therefore, the accounting records need to be processed through a series of steps in order to ensure that effective decisions are undertaken by financial information users. Now, for such decision making to be effective, the accounting information must be collected, analyzed, summarized and interpreted in a systematized manner. But it also communicates accounting information both to internal and external users for them to make important decisions. Therefore, we can say that accounting not only quantifies and measures transactions in monetary terms. The American Institute of Certified Public Accountants (AICPA) defines the term accounting as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of such information. Thus, accounting plays a critical role not only in operating a business but also in meeting statutory compliance and developing future financial projections. Every business’ management has to undertake various economic decisions on a day-to-day basis using the accounting information recorded in financial statements.
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