Accounting Procedure

Last Updated :

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Blog Author :

Rishab Nigam

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What is Accounting Procedure?

The accounting procedure is defined as the process of standardized nature that performs a specific accounting function designed to incorporate better risk management policies so that these functions are completed more productively and efficiently. The accounting department performs several functions, such as billings for their customers, providing invoices to suppliers, and performing bank reconciliation; hence such tasks normally require comprehensive and streamlined procedures.

Table of contents

Characteristics of Accounting Procedure

Accounting Procedure

#1 - Collection of Financial Information

It begins with the collection of financial documents. The information collected may be logged and maintained through physical or electrical modes. The cash register tapes, incoming bills, receipts, records of salaries, travel receipts, forms, and invoices are examples of financial documents.

#2 - Account Reconciliation and Verification

Once logged into the system, the accountants verify the financial information with the available evidence. Account reconciliation and internal and external reporting are performed as per the established accounting procedures. These procedures should be designed and constructed so that it records valid, objective, and accurate information. In addition, the procedures should be consistent and comparable.

Examples of Accounting Procedures

Example #1

The best example to describe the above point is that of inventory valuation. Once it is determined that inventories are to be recorded and valued using the First-in first-out inventory method, it should not be changed to any alternative valuation method such as that to either the LIFO inventory method or weighted average method.

Example #2

Another example could be billing procedures wherein invoices are generally issued to the customers. This involves three broad tasks: information collection for invoices, creating invoices, and issuing them back to the customers. For example, the people responsible for the billing process may review daily billing information and verify prices to process the order. Once the review activity is complete, it may ask the system to print the invoices in a batch and wherein such printed invoices are then sent over to the billing address.

Example #3

The determination of payroll for the employees is another example. The payroll executive may collect the following information, such as timesheets wherein they may review and approve the timesheets to record the hours spent by the employees working towards the said task. For the tasks worked, the corresponding wage rate is applied, and this, in turn, is utilized to determine gross pay and the net pay after tax deductions.

Example #4

Calculation of depreciation for fixed assets is another example. Basis the reporting requirements on taxes or for accounting purposes, adoption of the MACRS depreciation or straight-line depreciation method can be looked upon to determine the asset's depreciation expense.

Advantages

  • IT helps in the process of decision making as it provides a framework and also an effective division of work between accounting departments.
  • Different accounting procedures require different levels of specialization and skills to record the information into the accounting systems.
  • It helps in recording of information of financial nature and non-financial nature.
  • It ensures that the recorded information can be cross-verified. It helps makes financial statements of uniform in nature and which could be utilized for industry analysis.
  • Applying the right accounting procedures ensures efficiency and time-saving in recording information into the system.
  • It ensures that the business records are maintained in chronological order.
  • It ensures that the business complies with all legal and regulatory compliance.

Disadvantages

  • The accounts maintained and formed as per accounting procedures can be easily manipulated if the processes are not revised as per the present applicable guidelines prescribed as per the accounting standards and legal compliance.
  • The information shared and prepared through adopted procedures may be biased due to human errors and judgments.
  • Non-compliance with accounting principles in the procedures may result in incorrect information recording.
  • It helps in the division of work among different departments. Still, it also creates unnecessary silos, which in turn produces difficulty in the reconciliation process of the financial information.

Conclusion

The accounting procedures are a set of tasks or processes that helps the accounting department to streamline and perform useful accounting functions. This ensures better information management with increased transparency and robust reporting of facts. Correct and to the point procedures of accounting help in the preparation of useful and accurate financial statements.