Introduction : The accounting process is a series of activities that begins

with a transaction and ends with the closing of the books. Because this
process is repeated each reporting period, it is referred to as the accounting
cycle and includes these major steps:

1. Identify the transaction or other recognizable event.

2. Prepare the transaction's source document such as a purchase order or
invoice.

3. Analyze and classify the transaction. This step involves quantifying

the transaction in monetary terms (e.g. dollars and cents), identifying
the accounts that are affected and whether those accounts are to be
debited or credited.

4. Record the transaction by making entries in the appropriate journal,

such as the sales journal, purchase journal, cash receipt or
disbursement journal, or the general journal. Such entries are made in
chronological order.

5. Post general journal entries to the ledger accounts.

The above steps are performed throughout the accounting period as

transactions occur or in periodic batch processes. The following steps
are performed at the end of the accounting period:

6. Prepare the trial balance to make sure that debits equal credits. The
trial balance is a listing of all of the ledger accounts, with debits in the
left column and credits in the right column. At this point no adjusting
entries have been made. The actual sum of each column is not

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 meaningful; what is important is that the sums be equal. Note that
while out-of-balance columns indicate a recording error, balanced
columns do not guarantee that there are no errors. For example, not
recording a transaction or recording it in the wrong account would not
cause an imbalance.
7. Correct any discrepancies in the trial balance. If the columns are not
in balance, look for math errors, posting errors, and recording errors.
Posting errors include:

o posting of the wrong amount,

o omitting a posting,
o posting in the wrong column, or
o posting more than once.
8. Prepare adjusting entries to record accrued, deferred, and estimated
amounts.

9. Post adjusting entries to the ledger accounts.

10.Prepare the adjusted trial balance. This step is similar to the

preparation of the unadjusted trial balance, but this time the adjusting
entries are included. Correct any errors that may be found.

11.Prepare the financial statements.

o Income statement: prepared from the revenue, expenses, gains,

and losses.
o Balance sheet: prepared from the assets, liabilities, and equity
accounts.

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 o Statement of retained earnings: prepared from net income and
dividend information.
o Cash flow statement: derived from the other financial
statements using either the direct or indirect method.

12.Prepare closing journal entries that close temporary accounts such as

revenues, expenses, gains, and losses. These accounts are closed to a
temporary income summary account, from which the balance is
transferred to the retained earnings account (capital). Any dividend or
withdrawal accounts also are closed to capital.
13.Post closing entries to the ledger accounts.

14.Prepare the after-closing trial balance to make sure that debits equal
credits. At this point, only the permanent accounts appear since the
temporary ones have been closed. Correct any errors.

15.Prepare reversing journal entries (optional). Reversing journal entries

often are used when there has been an accrual or deferral that was
recorded as an adjusting entry on the last day of the accounting
period. By reversing the adjusting entry, one avoids double counting
the amount when the transaction occurs in the next period. A reversing
journal entry is recorded on the first day of the new period.

Instead of preparing the financial statements before the closing journal

entries, it is possible to prepare them afterwards, using a temporary income
summary account to collect the balances of the temporary ledger accounts
(revenues, expenses, gains, losses, etc.) when they are closed. The temporary

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income summary account then would be closed when preparing the financial
statements.

What are the steps in the accounting process?

The accounting process is three separate types of transactions used to record

business transactions in the accounting records. This information is then
aggregated into financial statements. The transaction types are:

1. The first transaction type is to ensure that reversing entries from the
previous period have, in fact, been reversed.
2. The second group is comprised of the steps needed to record
individual business transactions in the accounting records.
3. The third group is the period-end processing required to close the
books and produce financial statements.

We will address these three parts of the accounting process below.

Beginning of Period Processing

Verify that all transactions designated as reversing entries in preceding

periods have actually been reversed. Doing so ensures that transactions are
not recorded twice in the current period. These transactions are usually
flagged as being reversing entries in the accounting software, so the reversal
should be automatic. Nonetheless, examine the accounts at the beginning of
the period to verify the reversals. If a reversing flag was not set, an entry
must be reversed manually, using a new journal entry.

Individual Transactions

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The steps required for individual transactions in the accounting process are:

1. Identify the transaction. First, determine what kind of transaction it

may be. Examples are buying goods from suppliers, selling products
to customers, paying employees, and recording the receipt of cash
from customers.
2. Prepare document. There is frequently a business document to be
prepared or recognized to initiate the transaction, such as an invoice to
a customer or an invoice from a supplier.
3. Identify accounts. Every business transaction is recorded in an
account in the accounting database, such as a revenue, expense, asset,
liability, or stockholders' equity account. Identify which accounts are
to be used to record the transaction.
4. Record the transaction. Enter the transaction in the accounting system.
This is done either with a journal entry or an on-line standard
transaction form (such as is used to record cash receipts against open
accounts receivable). In the latter case, the transaction forms record
information in a pre-determined set of accounts (which can be
overridden).

These four steps are the part of the accounting process used to record
individual business transactions in the accounting records.

Period-End Processing

The remaining steps in the accounting process are used to aggregate all of
the information created in the preceding steps, and present it in the format of
financial statements. The steps are:

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 1. Prepare trial balance. The trial balance is a listing of the ending
balances in every account. The total of all the debits in the trial
balance should equal the total of all the credits; if not, there was an
error in the entry of the original transactions that must be researched
and corrected.
2. Adjust the trial balance. It may be necessary to adjust the trial balance,
either to correct errors or to create allowances of various kinds, or to
accrue for revenues or expenses in the period.
3. Prepare adjusted trial balance. This is the original trial balance, plus or
minus all adjustments subsequently made.
4. Prepare financial statements. Create the financial statements from the
adjusted trial balance. The asset, liability, and shareholders' equity line
items form the balance sheet, while the revenue expense line items
form the income statement.
5. Close the period. This involves shifting the balances in the revenue
and expense accounts into the retained earnings account, leaving them
empty and ready to receive transactions for the next accounting
period.
6. Prepare a post-closing trial balance. This version of the trial balance
should have zero account balances for all revenue and expense
accounts.

In reality, any accounting software package will automatically create all

versions of the trial balance and the financial statements, so the actual steps
in the accounting process may be considerably reduced. Instead, the steps
used in a computerized environment are likely to be:

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 1. Prepare financial statements. This information is automatically
compiled from the general ledger by the accounting software.
2. Close the period. The accounting staff closes the accounting period
that has just been completed, and opens the new accounting period.
Doing so prevents current-period transactions from being
inadvertently entered into the prior accounting period. In a multi-
division company, it may be necessary to complete this period closing
step in the software for each subsidiary.

Verify that all transactions designated as reversing entries in preceding

periods have actually been reversed. Doing so ensures that transactions are
not recorded twice in the current period. These transactions are usually
flagged as being reversing entries in the accounting software, so the reversal
should be automatic. Nonetheless, examine the accounts at the beginning of
the period to verify the reversals. If a reversing flag was not set, an entry
must be reversed manually, using a new journal entry.

Individual Transactions

The steps required for individual transactions in the accounting process are:

1. Identify the transaction. First, determine what kind of transaction it

may be. Examples are buying goods from suppliers, selling products
to customers, paying employees, and recording the receipt of cash
from customers.
2. Prepare document. There is frequently a business document to be
prepared or recognized to initiate the transaction, such as an invoice to
a customer or an invoice from a supplier.

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 3. Identify accounts. Every business transaction is recorded in an
account in the accounting database, such as a revenue, expense, asset,
liability, or stockholders' equity account. Identify which accounts are
to be used to record the transaction.
4. Record the transaction. Enter the transaction in the accounting system.
This is done either with a journal entry or an on-line standard
transaction form (such as is used to record cash receipts against open
accounts receivable). In the latter case, the transaction forms record
information in a pre-determined set of accounts (which can be
overridden).

These four steps are the part of the accounting process used to record
individual business transactions in the accounting records.

Period-End Processing

The remaining steps in the accounting process are used to aggregate all of
the information created in the preceding steps, and present it in the format of
financial statements. The steps are:

1. Prepare trial balance. The trial balance is a listing of the ending

balances in every account. The total of all the debits in the trial
balance should equal the total of all the credits; if not, there was an
error in the entry of the original transactions that must be researched
and corrected.
2. Adjust the trial balance. It may be necessary to adjust the trial balance,
either to correct errors or to create allowances of various kinds, or to
accrue for revenues or expenses in the period.

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 3. Prepare adjusted trial balance. This is the original trial balance, plus or
minus all adjustments subsequently made.
4. Prepare financial statements. Create the financial statements from the
adjusted trial balance. The asset, liability, and shareholders' equity line
items form the balance sheet, while the revenue expense line items
form the income statement.
5. Close the period. This involves shifting the balances in the revenue
and expense accounts into the retained earnings account, leaving them
empty and ready to receive transactions for the next accounting
period.
6. Prepare a post-closing trial balance. This version of the trial balance
should have zero account balances for all revenue and expense
accounts.

In reality, any accounting software package will automatically create all

versions of the trial balance and the financial statements, so the actual steps
in the accounting process may be considerably reduced. Instead, the steps
used in a computerized environment are likely to be:

1. Prepare financial statements. This information is automatically

compiled from the general ledger by the accounting software.
2. Close the period. The accounting staff closes the accounting period
that has just been completed, and opens the new accounting period.
Doing so prevents current-period transactions from being
inadvertently entered into the prior accounting period. In a multi-
division company, it may be necessary to complete this period closing
step in the software for each subsidiary.

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The accounting process is a series of activities that begins with a transaction
and ends with the closing of the books. Because this process is repeated each
reporting period, it is referred to as the accounting cycle and includes these
major steps:

Instead of preparing the financial statements before the closing journal

entries, it is possible to prepare them afterwards, using a temporary income
summary account to collect the balances of the temporary ledger accounts
(revenues, expenses, gains, losses, etc.) when they are closed. The temporary
income summary account then would be closed when preparing the financial
statements.

Property, plant and equipment Issued capital and reserves attributable

Investment property to owners of the parent
Intangible assets Non-controlling interests
Financial assets Financial Liabilities
Investments accounted for using
Provisions
equity method
Biological assets
Inventories
Trade and other receivables Trade and other payables
Cash and cash equivalents
Totals of assets in accordance with Totals of liabilities in accordance with
IFRS 5 Non-current assets Held for IFRS 5 Non-current assets Held for
Sale and Discontinued Operations Sale and Discontinued Operations
Current tax assets Current tax liabilities
Deferred tax assets Deferred tax liabilities

Further subclassifications of the line items shall be disclosed either

directly in the statement of financial position or in the notes, such as

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disaggregation of property, plant and equipment into classes, and similar.
Also, certain information related to the share capital, reserves and a few
others shall be included in the statement of financial position, the statement
of changes in equity or in the notes.

IAS 1 does NOT prescribe the precise format of the statement of financial
position. Instead, several formats are acceptable if they fulfill all
requirements outlined above.

Statement of Comprehensive Income

The statement of comprehensive income has 2 basic elements:

 Profit or loss for the period: here, all items of income and expenses
must be recognized.
 Other comprehensive income: items recognized directly to equity or
reserves, such as changes in revaluation surplus, gains or losses from
subsequent measurement of available-for-sale financial assets, etc.

As a minimum, the statement of comprehensive income must contain the

following items:

PROFIT OR LOSS
Revenue
Gains and losses arising from the derecognition of financial assets at
amortized cost
Finance costs
Share of the profit or loss of associates and joint ventures accounted for
using the equity method
Tax expense
Post-tax profit/gain or loss of operations or assets in accordance with IFRS 5

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PROFIT OR LOSS
(Non-current assets Held for Sale and Discontinued Operations)
Profit or loss

OTHER COMPREHENSIVE INCOME

Each component of other comprehensive income classified by nature
Share of the other comprehensive income of associates and joint ventures
accounted for using equity method
Total comprehensive income

As opposed to US GAAP, IAS 1 prohibits to report any transaction or item

as extraordinary items.

Profit or loss for the period, as well as total comprehensive income shall be
both presented in allocation:

 attributable to non-controlling interests and

 attributable to owners of the parent.

The entity might choose to classify expenses recognized in profit or loss for
the period by their nature or by their function.

IAS 1 requires disclosure of certain items separately, either in the statement

of comprehensive income, or in the notes. These items are as follows: write-
downs of inventories and property, plant and equipment, their reversals,
restructuring of activities and reversals of related provisions, disposals of
property, plant and equipment, disposals of investments, discontinuing
operations, litigation settlements and other reversals of provisions.

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Statement of Changes in Equity

As a minimum, the statement of changes in equity must contain the

following items:

 total comprehensive income for the period, showing separately

amounts attributable to owners of the parent and to non-
controlling interests
 the effect of retrospective application or restatement for each
component of equity (if applicable)
 the reconciliation between the carrying amount at the beginning and
the end of the period for each
component of equity. Here, the following changes shall be disclosed
separately:
o those resulting from profit or loss
o resulting from other comprehensive income
o resulting from transactions with owners (contributions,
distributions and changes in ownership)

Also, IAS 1 prescribes to present amount of dividends recognized as

distributions and the related amount per share on the face of the statement of
changes in equity or in the notes.

Notes to the Financial Statements

The notes are meant to be the document accompanying numerical financial

statements listed above. They should provide additional information not
contained in the numbers, the basis of preparation of the financial statements
and some additional information that might be relevant.

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IAS 1 sets that the notes shall contain a statement of compliance with IFRS,
summary of significant accounting policies applied, supporting information
for the numbers presented in the financial statements and other disclosures.

IAS 1 is shortly summarized in the following video:

Problem-7
The trial balance was prepared from the ledger of Delta Company at
December 31, 2014. The company maintains its accounts on a calendar
year basis closes the accounts only once a year.

Delta company
Trial Balance
Accounts title Taka
Cash 20,000
Accounts receivable 76,000
Inventory, January 1 1,40,000
Unexpired insurance 4,000
Office supplies 1,800
Building 1,35,000
Dividends 26,000
Sales return & allowance 42,000
Sales discount 16,000
Cost of goods sold 4,30,000
Advertising expenses 5,000
Salaries expense 1,10,000
Utilities expense 7,000
Total 10,12,800
Accounts title Taka

Notes payable 76,000

Accounts Payable 60,000
Capital stock 1,00,000

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 Retained earnings 94,800
Sales 6,58,000
Total 10,12,800

Other data:
(a) Unexpired insurance at the end of the year was determined to be Tk. 1,500.
(b) Office supplies unused and on hand at year end amounted to Tk. 800,
indicating that supplies costing Tk. 1,000 had been used.
(c) The depreciation on the buildings is based on a 25 year life with a salvage
value of Tk. 15,000. Use straight line method to compute depreciation.
(d) A physical verification reveals that the merchandise inventory actually on
hand is Tk. 1,38,800.
(e) Income tax expense for the year was determined to be Tk. 7,500.
Required:
(i) Prepare a multiple step income statement for the year;
(ii) Prepare s classified balance sheet as of December 31

Solution
Req.(i)
Delta company
Income statement
For the year ended 31st December 2014.
Accounts title Tk. Tk. Tk.

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Revenue:
Sales 6,58,000
(-)Sales Return 42,000
(-)Sales discount 16,000
Net sales 60,000
Cost for goods sold 4,30,000
(+)Excess in merchandise inventory(1,40,000- 1,200 4,31,200
1,38,800) (4,31,200)
1,68,800
Gross profit

Operating exp:
(i) Selling and distribution exp. 5,000
advertising exp. 7,000 (12,000)
Utilities exp.
(ii) Office and administration Exp. 1,10,000
Salaries Exp. 2,500
Insurance Exp. 1,000
Office supplies exp. 4,800 (1,18,300)
Dep. exp. building 38,500
Net operating Incom
Non operating income
Non operating exp.; 38,500
Net income before tax 7,500
(-) Income tax 31,000
Net Income after tax

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Req.(ii)
Delta company
Balance sheet
As at 31st Dec.2014.
Accounts title Tk. Tk. Tk.
Assets: Current Assets:
Cash 20,000
A/R 76,000
Unexpired Insurance 4,000
(-) Insurance exp. 2,500 1,500
Office supplies 1,800
(-) office supplies exp. 1,000 800
Merchandise Inventory 1,38,800 2,37,100
Investment:
Fixed Assets:
Building 1,35,000
(-) Acc.Dep.(24,000+4,800) 28,800 1,06,200 1,06,200
Intangible Assets:
Total Assets 3,43,300
Liabilities & Owners Equity:
Current liabilities:
Notes payable 76,000
Account payable 60,000 1,43,500
Income tax payable 7,500
Long term liabilities:
Stockholder equity:

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Capital stock 1,00,000
Retained earning 99,800 1,99,800
Total liabilities & stockholder’s equity 3,43,300

Delta company
Retained earning
For the year ended 31st December 2014
Accounts title Tk. Tk.
Retained earning 94,800
(+) Net income 31,000 1,25,800
(-) Dividend (26,000)
Balance of Retained earning 99,800

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Conclusion : The statement of profit or loss and other comprehensive
income, as the name suggests, presents profit and loss for the period as well
as other comprehensive income. Other comprehensive income includes
income and expenses not recognised in profit or loss such as revaluation
surpluses. The statement of profit or loss and other comprehensive income
may be presented either as one statement or a separate statement of profit or
loss and statement showing other comprehensive income.

The standard provides guidance on the form and content of the financial
statements and the underlying accounting concepts. It also requires financial
statements to present fairly the position, performance and cash flows of an
entity. This is normally achieved by the application of IFRS.

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The accounting process is three separate types of transactions used to record
business transactions in the accounting records. This information is then
aggregated into financial statements. The transaction types are:

1. The first transaction type is to ensure that reversing entries from the
previous period have, in fact, been reversed.
2. The second group is comprised of the steps needed to record
individual business transactions in the accounting records.
3. The third group is the period-end processing required to close the
books and produce financial statements.

We will address these three parts of the accounting process below.

Reference :
1. Internet
2. Basic Accounting
3. Intermediate Accounting
4. My Own Opinion

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