On the basis of above definition,
procedure of accounting is divided into two parts:
(1) Generating financial information.
(2) Using the financial information
Generating financial information
(a) Recording: - It is basic function of accounting. All transaction
or events are evidenced by some documents like Purchase Bill, Bank Pass Book,
Sale Bill, Salary Slip etc. Recording is done in a book called Journal.
(b) Classifying: - It is systematic analysis of recorded data. In
this stage transaction or events of one nature are put at one place so as to
make more useful or informatics for uses. Book containing classified
information is called Ledger.
(c) Summarizing: - It is preparation and presentation of classified
data to internal as well as external users of financial statement. This process
leads to preparation of Trial Balance, Profit and loss Account, Balance sheet.
(d) Analysis and interpretation: financial data is analysed and
interpreted so that the users of financial data can make a meaningful judgement
of the financial performance(profit) and financial position of the business.
Analysis helps in planning for future in better way. It is done through many
tools like ratio analysis etc.
(e) Communicating: - It is transmission of summarized, analyzed and
interpreted information to users so that they can take rational decision. It is
done through accounting reports like P & L A/c, Balance Sheet etc
2. Using the financial information
Users not only include proprietor or owner but
also include investor, employees, lender, suppliers, government, customer and
public at large. Accounting data is more useful if it stresses more on economic
substance rather than technical form. Information is useless and meaningless
unless it is relevant and material. Users of financial statement
- Directors - Lenders
Partners - Suppliers
employees - Govt.