Question

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What is the difference between bookkeeping and accounting?. Describe the six steps of the accounting cycle. What is the fundamental accounting equation used to prepare the Balance Sheet?”

Answer 1

-- Bookkeeping is primarily concerned with the identification measuring, and recording of the financial transactions. Accounting refers to the process of recording, classifying, summarizing, interpreting, and communicating the financial transactions that were classified in the ledger account.

-- Bookkeeping is the initial stage and is the base for accounting. Accounting starts where the bookkeeping ends.

-- Managers can't take a decision based on the basis of bookkeeping records; while on other hand the management can take critical business decisions on the basis of accounting records

-- In the bookkeeping process the financial statements are not prepared but in the accounting process the financial statements are prepared

-- Bookkeeping doesn't require any special sets of skill. On contrary accounting needs special skills due to its complex and analytical nature

-- Tools used in bookkeeping include journal and ledgers. In accounting the tools used are Balance Sheet, P&L Account and Cash Flow Statement

-- There are two basic types of bookkeeping i.e. single entry and double entry bookkeeping; while accounting sub-fields include Cost Accounting, Management Accounting, Financial Accounting, Social Responsibility Accounting and Human Resource Accounting.

The steps involved in accounting cycle are as follows:

1) Identification of financial transactions: The initial step in the accounting cycle is identification of the transaction that includes any financial transaction involving the exchange or use of a company's assets

2) Record transactions in a journal and Posting to the Ledger: In accounting cycle the second step is the recording of these entries in the company’s journal in chronological manner. The transactions are recorded in journal entries which includes at least two accounts (one credited and one debited). The transaction that were recorded as journal entries need to be posted to their appropriate account in the general ledger. After all transactions are posted to their respective ledger, the balances of each account can be determined

3) Preparing the unadjusted trial balance: To ensure the equality of debits and credits as done in the general ledger, the company prepares an unadjusted trial balance. This is an approach to investigate and determine any fault or prove the accuracy of the previous steps before moving to the next step

4) Recording Adjusting Entries: Adjusting entries are made for accrual of expenses, accrual of income, prepayments (expense method or asset method), deferrals (liability method or income method), depreciation, and allowances. These are prepared for the updating of accounts before summarizing in the financial statements.

5) Preparing the adjusted Trial Balance and Financial Statements: After adjusting entries are made the adjusted trial balance is prepared to test if company's debits and credits match. The Financial Statements are termed to be the end-products of an accounting system. The balance sheet, cash flow statement and income statement can be prepared using the accurate balances.

6) Closing the books: The expense and revenue accounts are zeroed and closed out for the next accounting cycle. The reason is that the expense and revenue accounts are income statement accounts that depict performance for a certain period. Balance sheet accounts would not be closed because they depict the entity's financial position at a specific point in time

The fundamental accounting equation is that an asset equals the liabilities plus stock holder's equity