For centuries accounting was supposed to be a book-keeping activity. With changing business environment, the role of accountant has evolved from mere book-keeper to an important member of decision-making team whose role is to provide important financial information of the business. So, the accounting definition has also evolved over the period of time.
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Accounting can be defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.
To better understand the above definition, let’s understand some key elements of definition:
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Organisation refers to business enterprise, which works either for profit or for non-profit motive. For example, Reliance Industries, Tata Consultancy Services, Tata Motors etc. Depending upon its size and level of business operations, the organisation can be sole-proprietary concern, partnership firm, company, cooperative society, municipal corporation, local authority or any other association of persons.
Every business organisation involves economic events. For example, Suppose Tata Motors starts a manufacturing plant in Gujarat to manufacture Electric Cars. It requires land, plant and machinery, installation of machinery, raw material, labours etc. These all are events which consists of number of financial transaction such as buying/leasing land, purchasing machinery, transportation of machinery, site preparation for installation of machinery, purchasing of raw material, hiring of labour and staff etc. An economic event is defined as a happening of consequence to a business organisation which consists of transactions and which are measurable in monetary terms.
There are two types of economic events:
Accounting is a means by which necessary financial information about business enterprise is communicated. Many users need financial information in order to make important decisions.
The users of financial information can be divided into two broad categories:
The other important definitions of accounting are:
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