What Are Accounting Processes? A Beginner's Guide
The main reason people operate a business is to generate profit, as this helps convince the business owner and its shareholders of the value of their operation. It also helps present an attractive business portfolio to investors seeking to invest.
While this is important, it is equally crucial to keep track of all financial transactions while observing the accounting standards and regulations set by authorities. At the heart of the matter, the basis of accounting is all about tracking the flow of money in and out of the organization associated with business activities, which summarizes a series of accounting processes.
This article provides crucial insights into accounting processes and can act as a beginner's guide. It clarifies what accounting processes are, the steps involved, and their importance with key examples.
What are Accounting Processes?
Accounting processes or cycles are a series of steps or systematic and standardized procedures used to record, classify, summarize, and interpret financial transactions associated with business operations.
While accurate financial reporting offers a crucial function of accounting since it provides crucial business insights that are instrumental in making informed decisions about future forecasting and planning, it is vital to understand that accounting processes are fundamental for business owners, other stakeholders, and accounting professionals since they help evaluate an organization's financial position.
Why are Accounting Processes Important?
Accounting processes are important for any business for the following reasons:
- Assists in Decision-making: Accounting records are used to inform decisions by various business stakeholders. Xenett has a host of reporting features that are accessible to users, facilitating the provision of crucial data for informed decisions.
- Establishes financial control: Reliable financial statements require accurate records that are backed up with data. Xenett uses automated software that checks for accuracy in every accounting entry. This helps prevent the risk of errors, mismanagement of accounting transactions, and fraud.
- Performance evaluation: Accounting processes can help make informed decisions, as they assist in identifying areas for improvement in different aspects of accounting and management.
The Xenett review process identifies accounting errors immediately and suggests solutions that will facilitate accounting processes.
- Facilitates accurate financial reporting: Accounting processes ensure accounting records are accurate and consistent with business transactions.
- Helps meet compliance: Government and accounting bodies have standards that monitor organization compliance with regulation. Accounting process and ensure that accounting firms submit records that meet accounting principles, avoiding litigation and other accounting issues.
- Assist in gaining stakeholder trust: Stakeholders want transparency in operations, especially when it comes to financial reporting, as this will help them make informed decisions and evaluate financial performance. Through the Xenett client portal, stakeholders have unlimited access to information related to their accounts.
Key Components in Accounting Processes
- Transactions identification: Accounting processes require that all financial records associated with business be recognized and documented. These include sales, payment, and purchase records.
- Recording of transactions: This involves entering financial data into the system and recording them in the appropriate accounts. For example, expenses should be listed under the expense accounts. Xenett's centralized file management section offers folders where all data related to clients' accounts are organized.
- Classification: Accounting processes facilitate the grouping of similar financial transactions. For example, in a balance sheet, all returns are grouped under sales revenue, and expenses are grouped under the cost of goods.
- Summarizing transactions: Accounting transactions generate summaries for all financial reports and statements.
- Integration of transactions: This component involves analyzing all compiled financial reports to draw conclusions related to business performance. It helps facilitate business decisions.
Accounting Processes
There are six key accounting processes or accounting cycle steps associated with any business in the field of accounting. These include:
- Transaction recording
- Transaction classification
- Summarizing data
- The preparation of financial statements
- Closing books
- Reviewing and auditing of financial information
Let us further elaborate on these accounting cycles
1. Transactional Classification
This is the first step in the accounting process. It involves recording every business transaction accurately, whether it is a sale, expense, or purchase. The record should be promptly recorded for clarification. Xenett reporting features allow for collective details of all the transactions made by each vendor in the GL snapshot and quickly identify any inconsistency.
To facilitate this, accounting software such as Xenett offers the best accounting tools to facilitate this accounting process. The software has accounting templates for invoices, spreadsheets, and accounting journals that businesses can fill out.
For example, in the case of a credit sale of $200, which increases sales, the journal entry will be recorded as
Debit: Accounts receivables $200
Credit: Sales revenue $200
This is a double-entry accounting, as the debit figure is matched with a similar credit figure.
2. Transaction Classification
After recording transactions, they need to be classified under different categories based on their nature. For example, there are assets, liabilities, expenses, and equity. Proper classification or categorization is important as it assists in tracking financial records and eases the process of generating financial statements.
For example, business expenses such as utilities and rent will be classified under expenses; paying suppliers and buying goods will be categorized in the balance sheet as the cost of goods sold.
Xenett has automated review features, allowing users to check and compare entries under the different categories for accuracy. Clients have access to the process, where they can review the points to fit their needs.
3. Summarizing Data
This is a crucial step as it involves gathering all the recorded transactions from the journal entries to the general ledger account, which is a collection of all accounts. It offers a summary of all the complete records of a business's financials, which are then recorded in the trial balance.
The professional accountant handling this process should ensure that the debit balance is equal to the credit balance in the trial balance.
The summarized records play a crucial role in determining the organization's financial performance. This is because the debit balances and credit balances for all accounts are clearly indicated.
4. The Preparation of Financial Statements
The next step in the accounting cycle is the preparation of financial statements. The financial statements vary depending on their intended purposes and present the financial oversight of the business. The most common financial statements are
- Cash flow statements: A statement of cash flow shows how cash flows in and out of the business. The analysis will derive a financial narrative on company cash management and liquidity capabilities.
- Balance sheets: A balance sheet outlines an organization's financial standing through its assets, liabilities, and shareholders' equity for a particular accounting period.
- Profit and loss statement/Income statement: This financial statement assesses an organization's profitability. It presents the company's revenue, expenses, profit, and losses over a specific accounting period.
- Statement of equity changes: This statement shows changes in ownership interest in an organization. The changes arise due to new investments, new shareholders joining the company, and dividend payments.
Shareholders, such as investors, suppliers, creditors, and managers, rely on these statements to gain financial knowledge about the business's financial position.
5. Closing Books
Every business needs to close its books at the end of any accounting period, whether monthly, quarterly, or annually. The closing process entails recording and finalizing all financial data relating to a specific period and preparing for the upcoming period.
The accounting cycle for this process involves:
- Closing temporary accounts: Temporary accounts like expenses and revenues need to be closed, and the financial records transferred to permanent accounts, setting the accounting reporting and records for a new period.
- Entry adjustments: Accounting professionals need to make the appropriate adjustments to financial statements. This helps present an accurate representation of a business's financial position.
- Preparing for audits: During the closing process, businesses often perform internal and external audits to determine whether the accounts presented are accurate and whether the financial records are complete.
The process of closing the books ensures that every accounting period is self-contained and that the financial record and results can be used to compare between accounting periods or within the industry.
Xenett's month-and-year-end close process has features that facilitate a smooth closing of the accounts. Some of the things to look forward to when using Xenett are Link Workpapers, a dashboard that tracks the close status, and the checklist, which is used to review each step of the close process.
6. Review and Audit of Financial Information
This is the final step of the accounting process. Reviewing and auditing is focused on ensuring the accuracy and reliability of financial information.
The purpose of reviewing is to determine that no material modifications should be made to the financial statements as they conform with the applicable financial reporting framework (e.g., GAAP or IFRS).
Auditing financial records ensures that the company complies with set accounting standards. It presents a systematic evaluation of evidence to provide a high level of assurance about the fairness and accuracy of the financial information. Audits also verify that the financial position depicted actually matches the facts presented in the financial reports. Undertaking this process attains transparency and builds the trust of stakeholders in the organization's activities.
How Xenett Facilitates the Accounting Processes
Automated processes
Xenett has automated many of the accounting processes by integrating accounting software solutions into their system. The automated features such as time-tracking transactions, autocorrecting entries, and dashboards that track the close status of an account.
The software helps eliminate errors that were previously associated with manual entry, eliminates delays in financial reporting, and provides checklists that enable the client to access and verify the closing entries listed.
Range of features
Through its diverse range of features, Xenett offers an array of accounting solutions. Its checklists allow stakeholders to check and verify whether every requirement is fulfilled, facilitating the accounting process.
Xenett has a client portal that allows clients to review their accounts and collaborate with the accounting team. This builds trust and transparency in the accounting process.
Other features, such as customizable templates, a help center, centralized document storage, and many more, help develop a user-friendly interface. With the Xenett platform, customers can verify information, ask and receive answers regarding the accounting process, and use results derived from the system to grow their operations.
Integrates accounting tools and software
Xenett is designed to work with your existing business accounting software, not replace it. This integration streamlines workflows and reduces the need for manual data entry and transfers.
One such software feature of XenettGO is that it integrates QuickBooks Online and Xero. This feature enables qualified accountants to control their workflow processes, eliminate errors in real-time, and
With accounting tools integrated into the platform, there are no more tedious manual checks or endless toggling between multiple apps. Instead, manage every accounting task on a single platform, streamline your operations, and uncover valuable hours to focus on growing your practice.
Facilitates accounts management
Xenett facilitates accounts management by streamlining workflows, enhancing collaboration, and improving data accuracy.
Xenett is instrumental in automating and managing the month-end close process. It provides features like checklists, task assignments, and sending automated reminders. This works to ensure that all necessary accounting process steps are completed efficiently and accurately.
The platform has features that help validate data and detect potential errors or inconsistencies in financial records. This helps ensure the accuracy of financial reports and reduces the risk of incorrect audit findings.
Xenett reporting features allow firms to track key metrics related to accounts management, such as client profitability, time spent on client engagements, and outstanding accounts receivables.
Conclusion
Understanding accounting processes is crucial for anyone involved in business, whether small or large, or for persons supervising individual accounts. By implementing efficient and effective accounting processes, businesses can ensure accurate financial reporting, make informed decisions, and maintain sound financial health for their operations.
For the accounting processes solution, Xenett offers an all-in-one package of accounting software and automation tools that enhance these processes, leading to increased efficiency and productivity for an organization. Xenett also helps businesses and accounting firms manage their client accounts more efficiently, accurately, and effectively. This leads to improved client relationships, increased profitability, and transparency.