There are four basic phases of accounting: recording, classifying, summarizing and interpreting financial data. Communication may not be formally considered one of the accounting phases, but it is a crucial step as well. All accounting information should be communicated properly to the appropriate parties after analyzing. Accounting reports must be prepared and distributed, and should include the basic income statement and balance sheet, as well as additional information including accounting ratios, diagrams, graphs and funds flow statements.
Recording is a basic phase of accounting that is also known as bookkeeping. In this phase, all financial transactions are recorded in a systematical and chronological manner in the appropriate books or databases. Accounting recorders are the documents and books involved in preparing financial statements. Accounting recorders include records of assets, liabilities, ledgers, journals and other supporting documents such as invoices and checks.
The classifying phase of accounting involves sorting and grouping similar items under the designated name, category or account. This phase uses systematic analysis of recorded data in which all transactions are grouped in one place. For example, "travel expenses" might be a category that accountants use to classify expenses relating to company travel. The term “ledger” refers to the book in which classifications are recorded.
The summarizing phase of accounting involves summarizing the data after each accounting period, such as a month, quarter or year. The data must be presented in a manner which is easy to understand and use by both external and internal users of the accounting statements. Graphs and other visual elements are often used to complement the text data.
The interpreting phase of the accounting process in concerned with analyzing financial data, and is a critical tool for decision-making. This final function interprets the recorded data in a manner which allows end-users to make meaningful judgments regarding the financial conditions of a business or personal account, as well as the profitability of business operations. This data is then used to prepare future plans and frame policies to execute financial plans.