Page 51 - DCOM101_FINANCIAL_ACCOUNTING_I

Unit 5: Accounting Equation and Accounting Cycle

Notes

Notes Classifying: It is one of the most important processes of the accounting. Under this,
grouping of transactions is carried out on the basis of certain segments or divisions. It can
be described as a method of rational segregation of the transactions. The segregation is
generally done into two categories, viz.
1. Cash transactions and
2. Non-cash transactions.
The preparation of the ledger A/cs and Subsidiary books are prepared on the basis of
rational segregation of accounting transactions. For eg, the preparation of cash book is
involved in the unification of cash transactions.

Summarizing: The ledger books are appropriately balanced and listed one after another.
The list of the name of the various ledger book A/cs and their accounting balances is known
as Trial Balance. The trial balance is summary of all unadjusted name of the accounts and
their balances.
Preparation: After preparing, the summary of various unadjusted A/cs are required to
adjust to the tune of adjustment entries which were not taken into consideration at the time
of preparing the trial balance. Immediately after the incorporation of adjustments, the fi nal
statement is readily available for interpretations.

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Did u know? What are the purposes of preparing fi nancial statements?
1. Accounting provides necessary information for decisions to be taken initially and it
facilitates the enterprise to pave way for the implementation of actions
2. It exhibits the financial track path and the position of the organization.

3. Being business in the dynamic environment, it is required to face the ever changing
environment. In order to meet the needs of the ever changing environment, the policies
are to be formulated for the smooth conduct of the business.

4. It equips the management to discharge the obligations at every moment.
5. Obligations to customers, investors, employees, to renovate/restructure and so on.

5.3 Summary

z The recording of business transactions in the books of account is based on a fundamental
equation called Accounting Equation.

z This equation expresses the equality of assets on the one side and other side equity
z Expenses and Revenue also affect the accounting equation. Their effect is always on the
capital account.

z The accounting equation is also the basis for the most basic of accounting reports, the aptly
named Balance Sheet.
z A balance sheet reports what a business owns (assets), what it owes (liabilities) and what
remains for the owners (equity) as of a certain date.
z Accounting is described as origin for the creation of information and the continuous utility
of information.

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