Different authors and thinks gave different accounting definition. Accounting deals with transactions which are financial in nature. Transaction is an event or condition, the recognition of which gives rise to an entry in account records. Event means happening of consequence to an entity.
According to money measurement concept, the transactions are expressed and recorded in terms of money as money is common denominator for all transactions. Any event that cannot be measured in terms of money, it will not be recorded in accounting.
Every transaction occurred during the course of business affects the assets and liabilities of the company. It is difficult for a person to each of these transactions as company enters into large numbers of transactions while carrying out it’s business activities. It is important to systematically record and classify the transactions, so that results of business activities can be summarised. These summarised financial records aids users of accounting information in business decision making.
Accounting is the principle means of communicating the financial information to investors, lenders, suppliers, mangers, employees, government regulatory authorities etc.
According to American Institute of Certified Public Accountants (AICPA), Accounting is the art of classifying and summarising in a significant manner and in terms of money, transactions and events which are in part of at least of financial character and interpreting the results thereof.
The definition of accounting consists of four steps:
Recording is the process of entering the transactions and events in books of original entry in date-wise chronological manner.
Classifying is the process of posting of entries in the ledgers so that transactions of similar type are accumulated at one place.
Summarising is the process of preparation of financial statements such as Income Statement, Balance Sheet and Cash Flow Statement.
Interpreting is the process of interpreting the financial statements in such a way that they are useful to the users of accounting information. The right information should be communicated to right person at right time.
More Accounting Definition
Some of the more prominent account definitions are:
- American Accounting Association defined Accounting as the process of identifying, measuring and communicating the economic information to permit informed judgement and decisions by users of information.
- Accounting Principles Board of American Institute of Certified Public Accountants defines Accounting as a service activity whose function is to provide quantitative information primarily financial in nature, about economic activities that is useful in making economic decisions in making reasoned choice among alternative courses of action.
What is Book Keeping?
The process of recording the business transactions in systematic manner and classifying them into ledgers is called Book Keeping. It is mechanical and repetitive in nature. It is the first part of accounting.
Types of Accounting Statements
There are three types of statements that are prepared in accounting:
- Balance Sheet: It provides information about the financial position of firm i.e. assets, liabilities and equity.
- Profit & Loss Account: It provides information about the performance of firm during the accounting period i.e. the profit earned or the loss incurred.
- Cashflow Statement: It provides information about cash movement i.e. the source and use of cash.
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