What is accounting?
Accounting Definition
The most precise statement, defining the term Accounting is:
“The process of identifying, measuring, and communicating economic information thus allow its users to make informed decisions.”
Accounting can be described as a process of identifying, measuring, and communicating economic and financial information, thus, enabling its users to make informed decisions. Sounds simple, right?
Accounting is a system that aims to measure business activity, process it, and provide information to decision-makers. The financial information recorded and captured by the accounting process is organized and presented in a way that is useful for decision-making.
The information obtained through the above-stated activities is usually conveyed in the form of various reports and statements. A few of these statements are prepared and presented in a typical format and in a formal way. The most common forms of such statements are called Financial Statements.
Accounting and Businesses/ organizations
Generally, when people talk about accounting, they usually refer to accounting as used by businesses and organizations. Accounting can serve the need of any organization in many ways.
A tool for data recording
People working in business can’t remember all the details of each business transaction, so they have to keep records. Organizations not only record the amount received and payments made, but they also record the goods bought and sold, or consumed and used within the business for various reasons. This part of accounting is commonly called data recording and bookkeeping.
The recorded information is then summarised, analyzed in various ways to provide information to persons making decisions related to the business.
A tool for Summarizing financial Information
When data is being recorded, it needs to be organized so that it can be most useful in business. This is known as data classification and summarizing. After recording, transitions are classified into the appropriate head of accounts. Balances of all the accounts are then summarized and reported in the form of financial statements.
The systematic process of recording, classifying, summarizing, and reporting thousands of financial transactions, is a product of accounting. Hence, accounting makes it possible to find out how much profit or loss the business has made during a particular period. By adopting the accounting process it will also be possible to accurately assess what resources a business owns and what debt it owes/ is liable to pay back to its creditors at the end of any given period.
A tool to measure business Performance
All business organizations operate in a changing dynamic environment. Any new program of the organization or its competitor will affect the business. Accounting serves as an effective tool for measuring a company’s financial pulse rate. It is a continuous cycle of measuring results and reporting results to decision-makers.
Language of Business and Financial Decision
Accounting is something that may be used by people in their personal lives as much as it is used in businesses. We all use accounting in one way or another when we plan how effectively we can spend our money. We have to plan how much we will spend and how much we will save. We can write a budgetary plan for the year ahead, or we can easily keep it in our minds.
This knowledge of accounting is an added benefit in playing different roles. Many aspects of our personal lives are based on accounting, income tax, debt, financial planning, investment, and so on. We have different roles to play in our lives. A student, manager, an investor, etc.
However, accounting is considered the language of business, and we will limit our discussion to the business organizations and the various financial aspects of such organizations. Remember, there are many aspects to a business that may not be considered financial transactions or economic activity. Thus, a better way to understand accounting may be to call it the language for financial decisions/activities within an organization.
Business organizations are run by making a lot of decisions, which require timely and accurate information. One of the core objectives of running a business entity is to earn profit for its owner and while doing so, many questions (whether our business is profitable, whether our company shall introduce a new product line, whether current sales are enough, etc.) come to our minds. To answer such questions, we need to obtain information generated by the accounting process. Thus, accounting is a language through which information is conveyed to decision-makers.
Therefore, accounting professionals should be able to tell if the business is performing well. They should be able to identify the strengths and weaknesses of the business.
Therefore, in the end, it can be summarized that accounting is concerned with:
- Recording financial transactions data
- Classifying and summarizing recorded financial data;
- Communicating/ reporting what has been learned from the data.
