The accounting system encompasses the sequence of steps followed in the accounting process, from analyzing transactions to preparing financial statements and closing the accounts . This system is sometimes called the accounting cycle . The purpous of the system ,as illustrated in Figure 6.1,is to treat the business tansactions as raw material and develop the finished product of accounting ,the financial statements,in a systematic way.The steps in this system are as follows:
[1] The transactions are analyzed from the source documents.
[2] The transactions are recored in the journal.
[3] The entries are posted to the ledger.
[4] The accounts are adjusted at end of the preiod,usually with the aid of a work sheed.
[5] Financial statments are prepared from the work sheets.
[6] The accounts are closed to conclude the current accounting period and prepare for the beginning of the new accounting period.
6.2 Preparation of the Work Sheet
the flow of information affecting a business does not arbitrarily sotp at the end of an accounting period .In order to prepare the financial reports , accountants must collect relevant data to determine what should and what should not go in the financial reports, for example,accountants must examine insurance policies to se how much prepaid insurance has expired ,examine plant and equipment records to determine depreciiation ,take an inventory of supplies on hand ,and calculate the amount of accrued wages. These calculations, together with the other computations,analyses and preliminary drafts of statements ,make up the accountants`working papers. Work papers are important for tow reasons.First,they aid accountants in crganizing their work so that they do not omit important data or steps that affect the accounting statements .Second ,they provide evidence of what has been done so that accountants or auditors can retrace their steps and support the financial statements.
A special kind basis of working paper is the work sheet .The work sheet is used freuently as a preliminary step in the preparation of financial statements .Using a work sheet lessens the possibility of ignoring an adjustment ,aids in checking the arithmetical accuracy of the accounts,and facilitates the preparation of financial statements .The work sheet is not part of the ledger or the journal,nor is a financial statement.It is never published and is rarely seen by management .Nevertheless , it is a useful tool for the accountant.