Accounting is the art of recording, classifying and summarizing financial information in a manner, which is useful for different users of accounting information. The financial information in the form of transactions is first recorded in journal. It is then posted into relevant ledgers and from those ledgers, a statement called trial balance is created. Trial balance contains all accounts and their relevant balances. From trial balance, accountants create financial statements such as Income Statement, Balance Sheet and Cash Flow Statement.
Users of Accounting Statements
Accountants, who are in the medical industry, must be adept in accounting principles. They will be able to understand how financial transactions will pass through these financial statements. Other users such as shareholders will also see the value in these financial statements.
So it is very important to know the principles of accounting, using which we will record, classify and summarize the financial information. Later on, we will use a comprehensive example to show how a financial transaction will flow through an accounting system.
Identifying Financial Transaction
The first step is to understand whether the transaction is financial or non-financial because for accounting purposes, we are only concerned with financial information.
After identifying financial information, the second step is to record it as a financial transaction in journal. A journal is a list of transactions recorded chronologically. It shows the account to be debited and account to be credited with corresponding amounts.
The financial information is then classified into different ledgers. A ledger is also known as a T account because it resembles like a T. On the left hand side is classified debit amount and credit amount is classified on the right side.
From these ledger accounts, the left side and the right hand is totaled. Any balance is then carried forward.
From these ledger balances, we will create a summary statement called trial balance. The trial balance will show all those balances. The amounts on the debit side from ledger will show on debit side and credit amounts will show on credit side.
After the trial balance is created, we then move on and record adjustments at the end of the financial year using adjusting entries. Adjustments are related to prepaid rent, any rent which is paid in advance or any accrued liabilities such as wages payables.
After recording these adjustments, we will finalize the trial balance which is called Adjusted Balance Sheet.
The next statement is called Income Statement. Income Statement will show the income, expenses and net profit if the business. Amounts for sales, selling expenses, cost of goods sold, administrative and marketing expenses will be shown in the income statement. After subtracting all expenses from income, profit before tax is calculated. Tax provision is charged and then final net profit is calculated. The net profit figure will be transferred to balance sheet.
The balance sheet is then prepared. This statement will show all assets, liabilities and capital of the business. This is the most important statement in accounting statements. It will show all assets, such as land, buildings, inventory, accounts receivables. Liabilities such as accrued expenses, wages payable, bank loans, will be shown under liabilities.
Finally, the capital section will show the amount invested into business and any accumulated profits.
Any medical account will train himself in preparing
these financial statements.