Meaning of Accounting:
Accounting is the language of finance. It shows the financial position of the business or the firm to any individual who wants to know. It assists with translating the functions and the workings of a firm into substantial reports that can be analyzed.
The American Institute of Certified Public Accountants (AICPA) in 1941, had characterized accounting as the craft of recording, classifying, and summing up in a significant manner and in terms of money, various transactions and events which are, to some degree, of financial character, and interpreting the outcomes thereof. With greater economic development bringing about a changing role of accounting, its scope got more extensive and became broader.
The American Accounting board also known as the American Accounting Association (AAA) in 1966, said accounting is the process of identifying, measuring and conveying economic information to allow informed decisions by users of information.
So as to appreciate the exact nature of accounting, we should understand the following significant aspects of the definition:
- Economic Events: Business associations and organisations include economic events. An economic event is known as an occurrence of the consequence to a business organisation which comprises transactions and which are measurable in financial terms. For instance, purchasing machinery, getting it installed and keeping it prepared for manufacturing is an event which involves a number of monetary exchanges, such as, purchasing a machine, transportation of the machinery, site groundwork for installing the machine, expenses incurred on its installation and trial runs. Therefore, accounting identifies a bunch of transactions relating to an economic event.
- Identification, Measurement, Recording and Communication: Accounting performs various functions:
- Identification: Accounting identifies financial transactions which are expressed in terms of money .
- Recording: Once financial transactions are identified , such transactions are recorded in the books of accounts through journal entries
- Classifying: Transactions recorded in Journal are classified and recorded to the main books of accounts under individual Ledgers.
- Summarizing: It involves presenting the data classified above in the form of Trading and Profit and loss account, Trial balance and Balance Sheet.
- Analysis and interpretation: This stage involves determination of profitability and the financial position of the business
Communicating: The results are thereafter communicated to the users.
- Organisation: Organisation refers to a business venture, regardless of whether for profit or not for a profit motive. Depending on the size of activities and level of business operations, it tends to be a sole-proprietory concern, cooperative society, local authority, company, partnership firm, municipal corporation or some other organisation of people.
- Interested Users of Information: Accounting is a method by which necessary financial data about business enterprise is conveyed and is likewise called the language of business. Numerous users need financial data so as to make significant decisions.
Accounting is an art of recording, summarising and classifying business transactions. This helps interested users to ascertain the true position of the business.