Fundamentals of Accounting

What is accounting?
To understand the fundamentals of accounting, you must comprehend the definition of

accounting.
Accounting is consolidating the financial transactions of a company using a systematic
approach. It involves recording, analyzing, reporting, and retrieving financial
transactions when required. Accounting is mandatory for legal reasons, taxes, and to
understand business health. Accounting ensures that every business transaction is
accounted for and if you need to pull out information about any expense you can do so
with ease.
Accounting can be divided into two parts; financial accounting and management
accounting.
Financial accounting deals with the proper presentation of the transactions in the form
of financial statements such as income statements which are shared with people
outside the business.
Management accounting is a form of accounting whereby the management department
receives financial information so they can take vital business decisions to ensure
efficient business continuity. Management accounting is part of the internal process as it
is used for improving the overall business. It includes information such as the budget.
Key objectives of accounting

The three key objectives of accounting are as follows.
 Record keeping
The fundamentals of accounting include record keeping which is the primary function of
accounting. A business must use standard forms of storing and retaining information so
it can be retrieved when the need for it arises. Thorough and accurate storage of
records is essential for all transaction-related purposes. A software package such
as Tally Prime can be utilized to store every transaction that takes place.
 Reporting
Financial reporting is a key accounting objective after record keeping. Accounting
enables businesses to record and report their financial status at the end of a particular
period. It involves putting together transaction details and reports that are necessary to
make sense of a certain aspect of a business during a specific time period. Financial
statements are results of aggregating financial information of a business and these are
useful tools for reporting the financial parts of a business.
 Analysis
The reports which are based on the business records are analysed in accounting. When
business health needs to be determined then the business reports are analysed.
Analysis in accounting enables accountants to find out ways to improve business
efficiency, upgrade processes, and to see where unnecessary expenses are being made.
Analysis of financial reporting allows your business to run without problems as it
ensures no discrepancies are found.
Accounting process and steps

The accounting process is one of the fundamentals of accounting. Also known as an
accounting cycle, it follows a transaction from the moment it was recorded to when a
report is made using various transactions that occurred in a particular period of time.
Businesses can use single-entry accounting or double-entry accounting.
Firms use accounting software packages such as Tally Prime to automate the accounting
process. The benefits include saving time, effort, and money for storage, analysis, and
retrieval purposes. Companies can fully automate their accounting or they can leave
some aspects to be manually handled.
Steps of the accounting process
There are 8 steps in the accounting process. This is a framework and it can vary from
company to company as each company has an individual model that it works with.
 Step 1: Transaction identification

You need to identify your business transactions first. Every unique transaction needs to
be recorded so that it is reflected correctly. All expenses such as costs to acquire, repair,
and upgrade need to be accounted for. Additionally, every sale record must be stored so
it all sales transactions are in one place.
 Step 2: Journal creation

This step involves recording each transaction in a journal. You can choose between two
types of accounting; cash accounting and accrual accounting. The difference is when the
transactions are recorded and stored. Cash accounting is recorded the moment the cash
is paid or received. Accrual accounting is when transactions are recorded as they occur.
 Step 3: General ledger posting

After the entry in the journal, the transaction details need to be reflected in the general
ledger. The general ledger allows the categorization of transactions because they are
saved according to different accounts. That is, transactions of the same account are
recorded in one place and so on. This allows easy monitoring according to particular
accounts.
 Step 4: Trial balance

In this step, the trial balance is calculated. Ideally, the debits must be equal to credits for
every account. The trial balance throws light on the balances which have not been
adjusted yet in every account. When an unadjusted trial balance is found, it is analysed
in the next step of the accounting cycle
 Step 5: Worksheet analysis

Adjustment of the various transaction entries is done in this step of the accounting
process. First, you need to create a worksheet and make sure that the credits and debits
are equal to each other. In the case of accrual accounting, there is an additional step
here which is to adjust the entries for revenue and expense matching purposes.
 Step 6: Journal entries adjustment

This is the stage in the accounting cycle where adjustments need to be made. Once the
adjustments have been done, the trial balance is prepared again to ensure that the
debits are equal to the credits. Only then can you move on to the next step.
 Step 7: Financial statements

This step involves the financial statements that are generated after all the entries have
been adjusted in the journal. In the majority of the cases, the major financial statements
will include the cash flow statement, income statement, and balance sheet. These
uncover the truth behind how the business is doing financially and how much profits it is
earning.
 Step 8: Closing
The last step of the accounting cycle is when the books are closed. This holds for the
temporary accounts as they are shifted to permanent accounts. For example, the profit
and loss statement is transferred to the retained earnings accounts and so on. The
closing occurs at the end of the reporting period. After this, the cycle starts again.
Key accounting reports
The critical accounting reports are as follows.
 Balance sheet
The balance sheet contains information about the total liabilities, assets, and
stockholder equity. It gives information about the company’s resources and how these
sources are being financed. A balance sheet can help you make better business
decisions.
 Profit and loss statement
The profit and loss statement is also known as P&L and income statement. It shows the
revenues and expenses of a business over a period of time. A business is going in the
right direction when the profits exceed its losses.
 Statement of cash flows

This report summarizes the cash that is received or paid. It doesn’t reflect the non-cash
transactions that take place such as purchases made on the basis of credit. It contains
three parts; investing, operating, and financing. It gives information about cash
generation.
How accounting software helps businesses
An accounting software tool can take the complexity out of accounting. Whether the
business is small, growing, or enterprise-level, every business needs an accounting
software package.
Tally Prime is the best example of accounting software that handles everything. All you
need to do is record the bills and invoices.
Tally Prime will automate the rest. It minimizes human errors, automates management
of books of accounts, generates informative customized reports and financial
statements, and makes tax returns easy.
Additionally, it improves inventory management, ensures tax compliance, streamlines

business processes, aids in business forecasting, and accurately generates financial
statements. This ensures you know how your business is doing at every step of the way.
Some of the key features of Tally Prime:
 Record and book keeping

 Invoicing and billing
 Pre-defined chart of accounts
 Accounts receivable and payable management
 Wide range of accounting and financial reports
 Multi-currency support
 Sales and Purchase Management
 Online business reports
 Inventory Management
 Taxation support

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What is accounting?

To understand the fundamentals of accounting, you must comprehend the definition of

Key objectives of accounting

Accounting process and steps

Steps of the accounting process

 Step 1: Transaction identification

 Step 2: Journal creation

 Step 3: General ledger posting

 Step 4: Trial balance

 Step 5: Worksheet analysis

 Step 6: Journal entries adjustment

 Step 7: Financial statements

 Statement of cash flows

Additionally, it improves inventory management, ensures tax compliance, streamlines

Some of the key features of Tally Prime:

 Record and book keeping

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