Meaning of Accounting
Meaning of accounting: Accounting is not static in its functioning. Its role has been changing significantly with the development in the field of economics and commerce. Accounting is the analysis and interpretation of bookkeeping records. In includes not only the maintenance of accounting records but the preparation of financial and economic information which involves the measurement of transactions and other events relating to the entity.
Back in 1941, the Committee on terminology of the American Institute of Accountants (presently –American Institute of Certified Public Accountants or AICPA) gave following definition of accounting:
“Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof.”
This definition emphasizes on recording, classifying, summarising and interpreting the business transactions and events. Now-a- days, accounting has a much wider dimension as it provides meaningful information to the users. Accounting is regarded as a “service activity.”
The American Accounting Association (AAA) formulated the definition in 1966: It’s of an “Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information.”
The Accounting Principles Board (APB) of AICPA (USA) gave the definition of as an e accounting in 1970: “Accounting is a service activity. Its function is to provide quantitative 2 Mea information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”
A careful study of the above definitions reveals that the features of accounting in firstdefinitionare: recording classifying, summarising and interpreting the business transactions and events. In the second definition, important feature added is that accounting communicates economics information to its users for decision making. In the third definition, accounting is characterized as “service entity”.
The above statements about accounting show that the role of accounting is gradually widening. Some other prominent accounting academicians are also quoted below as regards their views on accounting.
“Accounting system is a means of collecting;summarising, analysing and reporting in have grown and monetary terms the information of business.” Robert N. Anthony
“Accounting may be defined as the identifying, measuring, recording and communicating of financial information”. Bierman and Derbin
“Accounting is the science of recording and classifying business transactions and events, primarily of financial character, and the art of making significant summaries, analysis and interoperation of those transactions and events and communicating the results to persons who must make decisions or form judgments.” Smith and Ashburne
Process of Accounting
Accounting as an information system is the process of identifying, measuring and communicating the economic information of an organisation to its users who need the information for decision making. The process of accounting contains the following steps
- Identifying the transactions and events: Accounting identifies transactions and events of a specific entity. A transaction is an exchange in which each participant receives or sacrifices value (e.g. purchase of raw material for cash). An event (whether internal or external) is a happening of consequence to an entity (e.g. purchase of raw material for production). An entity means an economic unit that performs economic activities.
- Measuring the identified transactions and events: Accounting measures the transactions and events in terms of a common measurement unit i.e.the ruling currency of country. In India, these transactions and events are measured in rupees before recording them.
- Recording: This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are, in fact, recorded but also that they are recorded in an orderly manner. Recording is done in the book ‘Journal’. This book may be further sub-divided into various subsidiary books such as cash journal (for recording cash transactions), purchases journal (for recording credit purchase of goods), sales journal (for recording credit sales of goods), etc. The number of subsidiary books to be maintained will be according to the nature and size of the business.
- Classifying: Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as ‘Ledger’. This book contains on different pages individual account heads under which all financial transactions of similar nature are collected. For example, there may be separate account heads for Travelling Expenses, Printing and Stationery, Advertising, etc. All expenses under these heads, after being recorded in the journal will be classified under separate heads in the ledger. This will help in finding out the total expenditure incurred under each of the above heads.
- Summarising: This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-users of accounting statements. This process leads to the preparation of the following statements:
- Trial balance, (ii) Income statement, and (ii) Balance sheet.
- Analysing: It is concerned with the establishment of relationship between the various items or group of items taken from income statement or Balance Sheet or both. Purpose of analysis is to identify the financial strengths and weaknesses of the enterprise. It provides the basis for interpretation:
- Interpreting: It is concerned with explaining the meaning and significance of the relationship so established by the analysis. Now-a-days, the first six functions are performed by electronic data processing devices and the accountant has to concentrate mainly on the interpretation aspects of accounting. The accountants should interpret the statements in a ‘manner useful to the users, so as to enable the users to make rational decisions out of alternative courses of action. The accountant should explain not only what has happened but also (a) why it happened, and (b) what is likely to happen under specified conditions
- Communicating: The accounting information after being meaningfully analysed and interpretedhas to be communicated in a proper form and manner to the proper person. This isdone through preparation and distribution of accounting reports, which include besides the usual income statement and the balance sheet, additional information in the form of accounting ratios, graph, diagrams, fund flow statements, etc. The initiative, imagination and innovative ability sales journal (for the accountant are put to test in this process.
Communication is preceded by an accounting cycle through which the identified and measured transactions and events pass. Accounting performs a basic function of a language that is to serve as a means of communication. It is an information system which communicates the accounting information to the users (whether internal or external) to enable them to make national decisions. As an information system, accounting may be viewed in figure.
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