Meaning of Accounting

What is the Meaning of Accounting?

According to the American Institute of Certified Public Accountants, the meaning of 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. 

Keeping a record of all financial transactions and disseminating the findings to those who need to know about them is the meaning of accounting.

The first step in accounting is to recognise financial events and transactions and then document them with the help of bookkeeping. Bookkeeping is the process of recording transactions and maintaining them in a journal, books or a set of subsidiary books. To make things easier to find, a good book-keeping system organises and summarises all transactions. Two sorts of records Keeping exist, single entry and double entry. The financial statements include a profit and loss statement, a balance sheet, cash flow and a statement of shareholders’ equity.

Difference between Bookkeeping and Accounting

Bookkeeping is a distinct form of accounting, and it’s important to know the difference between the two.

Bookkeeping is the practice of keeping track of financial information related to a company’s activities in a meaningful and organised manner. Accounting definition is “the science or art of evaluating and making sense of financial data”. Accounting relies on the data provided by book-keeping and book-keeping ends when accounting begins.

How are Financial Transactions Recorded in Accounting?

Aman invests 4, 00,000 for running a stationery business. On 1st January, he purchased goods for Rs. 2, 30,000 and sold them for Rs. 2, 94,000 during the month. He pays monthly rent for the shop amounting to Rs. 10,000 and has goods amounting to Rs. 30,000 left with him. 

Earning Rs. 84,000 surplus is an event; having the inventories in hand is another event while purchasing and selling goods, investment of money, and paying rent are transactions.

As we can observe, with the help of proper recording of financial transactions, many insights can be generated that can eventually help not only an individual but also big organisations to take necessary decisions around their business.

Objectives of Accounting

The objectives of accounting can be given as follows:

Systematic recording of transactions –

Accounting, or the systematic recording of financial information about company activities, is a primary goal of accounting. Transactions that have been recorded can then be categorised to make creating financial statements easier.

Ascertainment of the Income and Loss of the Business 

A profit and loss statement is prepared by an accountant to determine the profitability of a company over a specific period. When income exceeds costs, a company is considered profitable; however, when expenses surpass revenue, a company is said to be at a loss. Reasonable judgments are made easier with the support of a profit and loss statement. Management can explore why a firm is not financially rewarding or lucrative to take corrective action.

Ascertainment of the Assets and Liabilities – 

As a businessman, you want to know how much money you made or lost in a given time, how much money you owe (liability) and how much money you possess (assets). Accountants use a financial statement known as a Balance Sheet to get a sense of the company’s financial health. A company’s financial health may be gauged by looking at its balance sheet, which shows its assets and liabilities at a specific moment in time.

Providing Insights to the Decision-makers 

Financial statements are used in accounting to convey financial outcomes to numerous parties. Accounting aims to provide decision-makers with the knowledge they require to make more informed choices.

To know the Company’s Financial Health 

A company’s financial status is shown in the balance sheet and the company’s capacity to pay its debts in the short and long term.

What are the Different Fields of Accounting?

The various subfields of accounting are:

Financial Accounting  

There is a focus on creating financial statements and how they are presented to the stakeholders. There are no new transactions in this database; hence it is historical. The drafting of the Balance Sheet and the Profit & Loss Statement is the final stage in financial accounting.

Management Accounting 

A business unit’s internal reporting is the main focus here. A wide range of information is required to perform stewardship, planning, control, and decision-making management duties. Managerial accounting refers to the many methods in which information is grouped and prepared for managers to perform their duties.

Cost Accounting 

In the Institute of Cost and Management Accountants of England’s language, cost accounting is referred to as: “the process of accounting for cost which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.”

Conclusion

Accounting is used in economic activity, from a household function to the national government, to record transactions and occurrences and provide relevant information to help in decision-making.

The evolution of accounting is directly linked to the rise of the commercial world. As a result, accounting is best defined as recording business transactions and disseminating financial information about a company’s operations to assist in making business decisions. The goal of accounting is to provide logical and sound decision-makers with the information they require, and as a result, it is sometimes referred to as the business language.