What is Accounting? Definition and Meaning of Accounting

What is accounting definitionAccounting is a process of identifying and measuring quantitative financial activities and communicates these financial reports to the decision-makers.

Man is a social being. He cannot live in society.

Because all individuals have got their limitations, they are to depend on society as a whole for their necessary goods and services.

So, the exchange of goods and services among them is imperative.

This exchange brings financial changes among the participants and everyone may have the curiosity to know the effects of financial changes and results Accountancy can answer these sorts of queries.

The history and evolution of Accountancy are as ancient and diversified as the history of the evolution of human civilization, the beginning of the evolution of human civilization and the beginning of the evolution of accountancy is, so to say, twins.

Accountancy made its beginning since the ancient period. But when, where and how the process of accounting practices exactly started is hot very much clear.

In the ancient period, when people happened to live in forests, jungles and caves and hunted animals for their livelihood, they used to inscribe the records of their daily hunting on the walls of the caves.

With time human beings gradually started their social lives and started keeping their accounts by marking ticks on walls, making rope-knots and using various symbols.

With the gradual-increased demand for human needs and desires, the necessity of Accountancy was felt sharply.

At one stage Luca Pacioli – the father of Accountancy brought a revolutionary change in the field of accountancy by writing a book on Mathematics- “Summa de Arithmetica Geometria Proportioniet Proportionlita” – containing a chapter – “De Computes it Scriptures”- in which Double Entry System of bookkeeping was explained.

The Double Entry System is a recognized and generally accepted system all over the world and to date, this system is being used widely with its basic principles unchanged. Based on these basic principles, the accountants of modem age have established a scientific accounting system.

But, Accountancy has not yet attained its perfection. It is a lively and changing subject and its development is continuous.

Accountancy is an applied discipline. The system in which financial transactions of an organization for a particular period are recorded to know the operating results and the financial position of that concern to analyze and communicate the same to interested users is called Accountancy.

Determining and analyzing the effects and results of the financial events of an organization are the main functions of Accountancy.

Accountancy is an integral of two terms – accounts and science. In its literal meaning account means ‘counting’.

In an organization, account means the recording of transactions in a brief statement regarding persons, institutions, assets, liabilities, incomes, and expenditures under a classified appropriate title.

From the financial point of view, an account means a statement of events measurable in terms of money or money’s worth.

On the other hand, science means a disciplined knowledge of a particular matter.

Therefore, Accountancy generally means the systematic recording of transactions of an organization or a person and determining and analyzing the results and financial position of the same.

Renowned accountants and institutes have given various definitions of Accountancy. Some quotable definitions are mentioned below;

Definition of Accounting

According to A. W. Johnson; “Accounting may be defined as the collection, compilation and systematic recording of business transactions in terms of money, the preparation of financial reports, the analysis and interpretation of these reports and the use of these reports for the information and guidance of management”.

According to the American Institute of Certified Public Accountants [AICPA]; “Accounting is the art of recording, classifying and summarizing in a significant manner and terms of money, transactions and events, which are, in part at least, of a financial character and interpreting the result thereof”.

According to the American Accounting Association [AAA]; “Accounting refers to the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information”.

According to Weygandt, Kieso, and Kimmel; “Accounting is an information system that identifies records and communicates the economic events of an organization to interested users”.

In the light of the above discussion and definitions of Accounting, a comprehensive and meaningful definition of Accounting can be given as such;

Accounting is a discipline, well-equipped with techniques and methods through which all types of transactions measurable in terms of money or money’s worth, can be recorded, classified and summarized properly and systematically.

It helps to present and explain income, expenditure, profit-loss, and assets-liabilities of a particular period and helps the management and investors to be provided with necessary information and statements.

So we can say that;

So we can say; accounting is defined as an information system that maintains the process of identifying and measures the quantitative financial activities and communicate these financial reports to the decision-makers or the interested users of any organization.

Accounting is just a tool to measure the financial position of any entity involving economic activity. Accounting is an aid to management.

It is a system that keeps a record of financial events and analyzes them for presenting reports of the financial result and position of an economic entity.

The accounting process gives the management body the information necessary for making a decision. This information is needed for the interested parties; inside or outside of the organization.

The information that accounting gives is very important to run it, that why accounting is also known as “BUSINESS LANGUAGE”.

Accounting as a Language of Business

Language is a media of communication process transmitting one person to another person, one person to another business, one business to another person that may take several different forms-oral, written and nonverbal.

Accounting is an information system of identifying, recording and communicating the economic events of a business organization to interested users.

So easily we can say that accounting as a language of business.

Accounting Functions

Accounting is the process of identifying, recording and communicating the economic events an organization to interested users of the information. Accounting has various functions in various fields such as in the society, organization, an individual, banking sector, production, and everyday life, etc.

The major functions of accounting are as follows:

  • To prepare financial statements, income statement, balance sheet, owner’s equity statement and cash flow statement.
  • To prepare necessary notes and disclosures to the users about the financial positions of the organization.
  • To perform the managerial functions for the organization i.e; business and non-business activities maintaining, budgeting, standard-setting, controlling and decision making.
  • To process of identifying, recording and communicating the economic events an organization to interested users of the
  • To analyze and interprets financial activities for next rectifying and improvements.

What type of unit is served by accounting?

Accounting activities may occur within or outside the organization.

Although accounting is usually identified with privately owned, profit-seeking entities, its sendees also are provided to not-for-profit organizations such as universities or hospitals, to governmental organizations, and other types of units.

The organizations may be small, owner-operated enterprises offering a single product or service, or huge multi-enterprise, international conglomerates with thousands of different products and services. The not-for-profit, governmental, or other units may be local, national, or international; they may be small or very large; they may even be entire nations, as in national income accounting

Since not-for-profit and governmental accounting are covered elsewhere in this encyclopedia, the balance of this article will focus on accounting for privately owned, profit­seeking entities.

Generally Accepted Accounting Principles (GAAP)

GAAP is the foundation rules of accounting practices.

Another way, GAAP ere a common set of standards that indicates How to report economic events. Any types of standards are provided by FASB and SEC.

Generally Accepted Accounting Principles is established by the Financial Accounting Standards Board (FASB) and Securities Exchange Commission (SEC).

Accounting Concepts / Assumptions

Accounting concept is used to control accounting postulates i.e. necessary assumptions or conditions upon which accounting is based.

4 basic assumptions are the financial accounting structure: (1) economic entity, (2) going concern, (3) monetary unit, and (4) periodicity.

Accounting Convention or Principles

Accounting convention is used to signify customs or traditions as a guide to the preparation of accounting statements.

Accounting Ethics

The standards of conduct by which accounting actions arc judged as right or wrong, honest or dishonest, fair or not fair are called Accounting ethics.

Conclusion

Accounting may be defined as the collection, compilation and systematic recording of business transactions in terms of money, the preparation of financial reports, the analysis and interpretation of these reports for the information and guidance of management.”

Accounting is an information system that recognizes, registers and communicates the monetary events of an economic entity.

It refers to the process of identifying, measuring and communicating economic information to permit informed judgment and decisions by users of the information. In this changing world, human life is also changing.

With the change of everything trade and commerce are also changing and developing largely. Accounting is also changing with the changes, modifications, and complexities of business.

With the development of technology the implication of Accounting has achieved a new shape, one example is to keep accounts mechanically.

Recently with the extensive use of computer accounting tasks has created a new arena. So, it is clear the definition of Accounting will get a new shape in days ahead.

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