Meaning of accounting

Meaning of accounting

“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof”

As per this definition, accounting is simply an art of record keeping. The process of accounting starts by first identifying the events and transactions which are of financial nature and then be recorded in the books of account. This recording is done in Journal or subsidiary books, also known as primary books. Every good record keeping system includes suitable classification of transactions and events as well as their summarization for ready reference. After the transactions and events are recorded, they are transferred to secondary books i.e. Ledger. In ledger transactions and events are classified in terms of income, expense, assets and liabilities according to their nature and summarized in profit and loss account and balance sheet. Essentially the transactions and events are to be measured in terms of money. Measurement in terms of money means measuring at the ruling currency of a country, for example, Rupee in India, Dollar in U.S.A., Yen in Japan and like. The transactions and event must have at least in part, financial characteristics. The inauguration of a new branch of a bank is an event without having financial character, while the business disposed of by the branch is an event having financial character. Accounting also interprets the recorded, classified and summarized transactions and events.

“The process of identifying, measuring and communicating economic information to permit informed judgment and decisions by the users of accounts.”

In 1970, the Accounting Principles Board (APB) of American Institute of Certified Public Accountants (AICPA) enumerated the functions of accounting as follows:

“The function of accounting is to provide quantitative information, primarily of financial nature, about economic entities, that is needed to be useful in making economic decisions.”

Thus, accounting may be defined as the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the result thereof to the persons interested in such information.