Accounting is a process of identifying, measuring, recording, classifying, summarising, interpreting, and communicating financial business transactions and events in a useful manner.
“Accounting is the language of Business.”
Definitions of Accounting:
According to Smith and Ashburne, “Accounting is the science of recording and classifying business transactions and events, primarily of a financial character and the art of making significant summaries, analysis, and interpretations of these transactions and events and communicating results to persons who must make decisions or form judgment.”
American Accounting Association (AAA) defines accounting as “The process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information”.
The American Institute of Certified Public Accountants (AICPA) has defined “The art of recording, classifying, summarising, analyzing and interpreting the business transactions systematically and communicating business results to interested users in accounting”
We can say that accounting is the process of identifying, recording, classifying, summarizing, interpreting, and communicating financial information to the users for judgment and decision-making.
Key points of definition:
- Economic Events
- Identification of business transactions,
- Recording of business transactions,
- Interested Users of Information
Features Or Characteristics of Accounting:
1. Identification of Financial transactions and events:- It means determining what transactions to record, i.e., to identity events which are to be recorded. It involves observing activities and selecting those events that are of considered financial character and relate to the organization. The business transactions and other economic events therefore are evaluated for deciding whether it has to be recorded in books of account.
For example, the value of human resources, changes in managerial policies
or appointment of personnel are important but none of these are recorded in
books of account. However, when a company makes a sale or purchase, whether on cash or credit or pays wages it is recorded in the books of account.
2. Measurement of transactions in terms of money:- It means quantification (including estimates) of business transactions into financial terms by using the monetary unit, viz. rupees, and paise as a measuring unit. If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts. That is why important items like the appointment of a new managing director, signing of contracts or changes in personnel are not shown in the books of accounts
3. Recording of the Financial transactions in journal or subsidiary books:- Once the economic events are identified and measured in financial
terms, these are recorded in books of account in monetary terms and in a
chronological order. Recording is done in a manner that the necessary financial information is summarised as per well-established practice and is made available as and when required.
4. Classifying the business transactions:- After recording the financial transactions in journal or subsidiary books, the transactions are classified. Classification is the process of grouping the transactions of one nature at one place, in a separate account, known as ‘ledger’.
5. Summarising the business transactions by preparing Trial balance, Trading Account and profit and loss account and Balance sheet:- Summarising involves presenting the classified data in a systematic manner which is understandable and useful to the users of accounting information.
This involves the balancing of ledger accounts and preparation of Trial balance with the help of such balances. Final Accounts are prepared with the help of the Trial balance. Final accounts include Trading Account and profit and loss account and Balance sheet.
6. Analysing and Interpreting of business transactions:- In Accounting, the results of the business are analyzed and interpreted so that users( proprietors, managers, Banks,creditors, employees etc.) of financial statements(Trading and Profit and Loss Account) can make a meaningful and sound judgement about the profitabilty and financial position of the business.
7. Communicating the financial data to the interested parties(Internal Users and External Users):- Accounting involves information is generated and communicated in a certain form to management and other internal and external users. The information is regularly communicated through accounting reports. These reports provide information that are useful to a variety of users who have an interest in assessing the financial performance and the position of an enterprise, planning and controlling business activities and making necessary
decisions from time to time.
Objectives of Accounting:
1. To keep systematic and complete records of business transactions in the books of accounts according to specified principles and rules to avoid the possibility of omission and fraud.
2. To ascertain(Result)the profit earned or loss incurred during a particular accounting period which further helps in knowing the financial performance of a business.
3. To ascertain the financial position of the business by means of financial statement i.e. balance sheet which shows assets on one side and Capital & Liabilities on the other side.
4. To provide useful accounting information to users like owners, investors, creditors, banks, employees and government authorities, etc who analyze them as per their requirements.
5. To provide financial information to the management which helps in decision making, budgeting, and forecasting.
6. To ascertain the progress of the business from year to year.
1. Identification of Financial transactions and events;
2. Measurement of transactions in terms of money;
3. Recording the Financial transactions in journal or subsidiary books;
4. Classifying the business transactions through ledger;
5. Summarising the business transactions by preparing Trial balance, Trading Account and profit and loss account and Balance sheet;
6. Analysing and Interpreting the financial data;