Accounting has rightly been termed as the language of the business. The basic function of a language is to serve as a means of communication. It also serves this function. It communicates the results of business operations to various parties who have some stake in the business viz., the proprietor, creditors, investors, Government and other agencies. In this article we’ll be looking at what is accounting along with its definition, meaning and types.
The main purpose of accounting is to ascertain profit or loss during a specified period, to show financial condition of the business on a particular date and to have control over the firm’s property. Such financial records are required to be maintained to measure the income of the business and communicate the information so that it may be used by managers, owners and other interested parties. Accounting is a discipline which records, classifies, summarises and interprets financial information about the activities of a concern so that intelligent decisions can be made about the concern.
The American Institute of Certified Public Accountants has defined the Financial Accounting as, “the art of recording, classifying and summarising in as significant manner and in terms of money transactions and events which in part, at least of a financial character, and interpreting the results thereof”.
American Accounting Association defines accounting as “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.
From the above the following attributes of accounting emerge :
- Recording :
It is concerned with the recording of financial transactions in an orderly manner, soon after their occurrence In the proper books of accounts.
- Classifying :
It Is concerned with the systematic analysis of the recorded data so as to accumulate the transactions of similar type at one place. This function is performed by maintaining the ledger in which different accounts are opened to which related transactions are posted.
- Summarising :
It is concerned with the preparation and presentation of the classified data in a manner useful to the users. This function involves the preparation of financial statements such as Income Statement, Balance Sheet, Statement of Changes in Financial Position, Statement of Cash Flow, Statement of Value Added.
- Interpreting :
Nowadays, the aforesaid three 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 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.
Difference Between Accounting and Book-keeping:
Book-keeping is a part of accounting and is concerned with the recording of transactions which is often routine and clerical in nature, whereas accounting performs other functions as well, viz., measurement and communication, besides recording. An accountant is required to have a much higher level of knowledge, conceptual understanding and analytical skill than is required of the book-keeper.
An accountant designs the accounting system, supervises and checks the work of the book-keeper, prepares the reports based on the recorded data and interprets the reports. Nowadays, he is required to take part in matters of management, control and planning of economic resources.
Types Of Accounting:
To meet the ever increasing demands made on accounting by different interested parties such as owners, management, creditors, taxation authorities etc., the various branches have come into existence. There are as follows:
1. Financial accounting:
The object of financial accounting is to ascertain the results (profit or loss) of business operations during the particular period and to state the financial position (balance sheet) as on a date at the end of the period.
2. Cost accounting:
The object of cost accounting is to find out the cost of goods produced or services rendered by a business. It also helps the business in controlling the costs by indicating avoidable losses and wastes.
3. Management accounting:
The object of management accounting is to supply relevant information at appropriate time to the management to enable it to take decisions and effect control.