The present age is the age of trade business and commerce. After Globalisation, liberalization, and privatization, business is increasing day by day and becoming complex also. An organization cannot remember all its dealing for long. Therefore, it becomes necessary to keep written record of all business transactions day by day, this lead to the development of accounting. Let us understand the meaning of basic accounting.
Meaning of Accounting
Lucas Pacioli is considered to be Father of modern bookkeeping. The only recording of financial transaction in bookkeeping is not enough to achieve the commercial objective, but also it is important to know the financial result.
It is necessary that the recorded transaction is collected, classified and summarised. This work is done by accounting. After identifying the financial transaction, through the basic accounting process, these are recorded properly in a systematic manner in the books. The meaning of accounting can be made clearer by understanding its process and components.
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Process of Accounting
Accounting is a systematic process of identifying recording measuring classify verifying some rising interpreter and communicating financial information. It reveals profit or loss for a given period and the value and the nature of a firm’s assets and liabilities and owners’ equity.
In other words, accounting is a practice and body of knowledge concerned primarily with
- Method for recording transactions,
- Keeping a financial record,
- Performing internal audit
- Reporting and analyzing financial information to the management and
- Advising on taxation matters.
Definitions of Accounting
Some prominent definitions of accounting to help us better understand the meaning of basic accounting.
- According to Committee of Terminology of American Institute of Certified Public Account:” Accounting is the art of recording, classifying summarising in a significant manner and in terms of money, transaction, and events which are, in part at least of a financial character and interpreting the results thereof.”
- According to Bierman and Drebin:” Accounting may be defined as identifying, measuring, recording and communicating of financial information.”
Therefore accounting can be defined as” the process of recording, summarising, reporting and analyzing required financial information relating to the economic events of an organization to the interested users for making decisions.”
Components of Basic Accounting
The primary function of accounting is to make records of all transaction that the firm enters into. For the purpose of recording, accountant maintains a set of books. Their procedures are very systematic. Nowadays, the computer has been deployed to automatically account for transactions as they happen.
Recording of transactions creates raw data. Sentences of road 8000 of little used to in organization for decision making. Pages and pages of raw data are of little use to an organization for decision making. For this reason, the accountant classifies data into categories.
Management is answerable to the investors about the company’s state of affairs. The operations that are being financed with the money of owners, it needs to be periodically updated to them. For this reason, there are periodic reports annually summarising the performance of all four quarters are sent to them.
In the form of financial statements reporting is done. To ensure that there is no misleading financial reporting, these financial statements are also regulated by government bodies.
Learn more about Qualitative Characteristics, Objectives, and Roles of Accounting here in detail
Lastly, accounting entails conducting an analysis of the result. After results have been summarised and reported, meaningful conclusion needs to be drawn. Management must find out its positive and negative points. Accounting helps in doing so by means of comparison. It is common factors to compare profit, cash, sales, and assets etc. with each other to analyze the performance of the business.
Thus accounting is a language of business. It communicates the performance of business with various end users who are interested to know about the business. Accounting provides quantitative information of financial nature to both management and other users so that they can take a proper decision about business.
Basic Accounting: Science or Art?
Expert’s opinion differs on the issue whether an accounting is a science or an art. Some considered accounting is as science and some others as an art. It is not made very clear by the definition or the meaning of accounting either.
Science means a systematic body of knowledge which is based on definite rules and principles and establishes is the relationship between cause and effect. On the other hand, Art is a technique which helps in achieving a desired goals in the best possible manner.
Accounting is a Science
Accounting has its own principles holes and techniques. On the basis of these principles of injections recorded systematically in order to know the results of a business. That’s why it is regarded as a science.
Accounting is an Art
Every businessman records a business transaction in the books of accounts as per rules, according to the nature of the business and determine the results after analyzing, so it’s an art. Thus it is clear from the above discussion that accounting has the elements of both science and art.
Solved Example for You
Q: The first step in the accounting process is_______.
- None of the above
Ans: The correct answer is C. Maintaining proper and fine accounts has become very essential today, as a result, of increasing complementation in the business world. Every business organization is, therefore, supposed to maintain fine accounts comprising of all the financial transactions, financial as well as nonfinancial information.
We all know that any accounting involves a fine recording, summarizing, proper classification as well as the interpretation and communication of financial information. Every business has to be recorded first so that the other processes can be carried out effectively. Therefore the first step in the accounting process is recording.