The Accounting Process (Cambridge (CIE) AS Accounting): Revision Note

The accounting process

What is the accounting process?

• Stage 1: Transaction

  • A transaction takes place

  • Examples include:

    • The sale or purchase of goods, a service or an asset

    • Withdrawing or depositing cash

    • Paying an expense or receiving income

• Stage 2: Business document

  • A business document is issued or received

  • This is a record of the transaction

• Stage 3: Book of prime entry

  • The amount is entered into a book of prime entry

  • This collates the different types of transactions

• Stage 4: Ledger account

  • The entries from the books of prime entry are entered into the ledger accounts

  • These are part of the double-entry accounting system

Financial statements

What are financial statements?

• Financial statements are produced each year

• They show a summary of the business activity during the year

• The financial statements that most businesses produce are:

  • statement of profit or loss

  • statement of financial position

What is a statement of profit or loss?

• An accountant prepares a statement of profit or loss for a business to measure the profit or a loss

• The profit or loss is the difference between the total income and the total expenses 

  • A profit is made if the income is higher than the expenses

  • A loss is made if the income is lower than the expenses

• It can also show the gross profit for a trading business

  • This is the profit from trading activities

  • Gross profit = revenue - cost of sales

• It is important to produce a statement of profit or loss to measure the performance and profitability of a business

• It can be used to monitor the progress of the business 

  • If a profit is made, the owner is making money on their investment 

  • If a loss is made, the owner might have to make changes to the business

What is a statement of financial position?

• An accountant prepares a statement of financial position to show the current values of the

  • assets

  • liabilities

  • capital or equity

• It can be used to calculate the working capital

  • This is the amount of money a business would have left if it converted all of its current assets into cash and paid off its current liabilities

  • Working capital = current assets - current liabilities

• It is important to produce a statement of financial position to measure the liquidity of a business

• It can be used to make decisions about the business 

  • If there is a lot of cash, then the business might decide to purchase more non-current assets