What is Accounting?

What is Accounting?

Learning the basic of accounting is essential if you are a business owner, aspiring accountant, student, employee, accounting professional, or any person who earns income.

You may be aware or not, the truth is, you deal with accounting in your day to day activities.  Whenever you engage with an activity that is financial and monetary in nature, like buying and selling a product or service, you are already involved with an accounting transaction.

Many don’t understand the accounting terms, principles and process.  They leave the job to their accountants and let them interpret their financial condition.  However, most cause of a business failure is attributable to the lack of financial understanding and accounting knowledge of the owner.  The owner’s inability to control, monitor and interpret the business financial transactions creates mismanagement of the business operation.

In order to better manage your finances and grow your income, you need to start learning and understanding the basic of accounting.

Introduction to Accounting

Accounting is a vital part of any individual, business or organization’s economic foundation.  It plays a major role in defining financial condition and performance, in terms of operation, profitability and sustainability.

Accounting has several definitions by different authors and books.  However, based on the definition of American Institute of Certified Public Accountants (AICPA), accounting is defined as follows,

Accounting is the art of identifying, 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 results thereof.

This definition is widely accepted by most accounting professionals and organizations worldwide because of its conciseness and ease of understanding.

Other definition of accounting is as follows:

Accounting is an information system that provides reports to stakeholders about the economic activities and conditions of a business.  (Warren Reeve)

Accounting may be best defined as identification, measurement and communication of financial information about economic entities to interested persons. (Donald Kieso, Jerry Weygandt, Terry Warfield)

 To better describe and define accounting, here are the three essential characteristics of accounting you need to remember.

3 Essential Characteristics of Accounting

  1. It’s an information system which means it involves a process or procedure.
  2. It has an economic value which means it is stated in terms of money or currency.
  3. It communicates financial information of a business to stakeholders or interested parties.

Role of Accounting

Many categorize accounting as the language of business.  Because accounting is the means by which the business transactions and events are communicated to interested parties.

Accounting provides useful and timely information about the financial activities of an individual, business or organization.  It provides such information to interested party who uses accounting information in assessing the performance and condition of a business relevant to decision-making.

Without accounting, there is no easier and concise way to understand the transactions, financial results of operation and condition of an individual, business or organization.  Accounting makes it easier for interested party to understand the business operation just by looking at the accounting reports.

Story and Illustration

Apple Inc. is a business that sells innovative personal computers and gadgets worldwide, such as iPhone, iPad, iPod, Mac, etc., for profit.  Maria, an Apple Inc. loyal customer, went to the Apple Store and bought an iPAD worth $600.  After paying the $600 cash bill to Apple Inc. cashier, Maria went home happy to have her latest gadget.

Question:  How can you define accounting in this story and illustration?

Answer:  Accounting is responsible in recording, classifying and interpreting the transaction, significant and in terms of money, that occurred between Maria and Apple Inc.

In the accounting department of Apple Inc. the following is analyzed and processed:

  1. Identified transaction and event:  Sale of iPAD to customer Maria
  2. Significant and in terms of money:   $600
  3. Interpreting the results:  Increase in Cash and Revenue amounting to $600

In Maria’s personal accounting records, the following is analyzed and processed:

  1. Identified transaction and event:  Purchase of iPAD from the business, Apple Inc.
  2. Significant and in terms of money:   $600
  3. Interpreting the results:  Decrease in Cash and Increase in Expenses, if expense method is used (or equipment if asset account) amounting to $600

In this example, you will understand that buying (in the part of Maria) or selling (in the part of Apple Inc.) already involves an accounting transaction.  You can already interpret how much money was received by Apple Inc which increased their cash and revenue, as well as, how much was spent by Maria when her cash decreased and expense increased (or no effect if asset account was used).  We will discuss the expense or asset account method in other articles.

You are already at the end of this article.  I hope you were able to pick up valuable information.  To recap, remember that accounting includes the recording, reporting and interpreting the financial transaction and information relevant to an individual, business or organization.  Interested party or stakeholder uses this accounting information to facilitate decision making.

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Comments

  1. Pls I need more definitions

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