Accounting in a very simple sense is maintaining a record of varied activities. Thus, Accounting is some things that are used almost by everyone in their daily lives. In our lifestyle, we maintain a record of varied transactions or activities. After going through this lesson, you will understand the actual meaning of accounting.
Meaning of Accounting
Accounting may be a process of identifying the events of monetary nature, recording them in Journal, classifying them in their respective ledgers, summarising them in Profit and Loss Account and Balance Sheet, and communicating the results to its users like proprietors, government, creditors, investors, etc.
According to the American Institute of Certified Public Accountants, 1941, “Accounting is that the art of recording, classifying and summarizing during a significant manner and in terms of money; transactions and events which are, partially a minimum of, of a financial character, and interpreting the results thereof.”
In the words of Bierman and Derbin, “Accounting may be defined as identifying, measuring, recording and communication of financial information.” In the opinion of Smith and Ashburne, “Accounting is the science of recording and classifying business transactions and events, primarily of a financial character, and therefore the art of creating significant summaries, analysis and interpretations of these transactions and events and communicating the results to persons who must make decisions or form judgment.”
Accounting cares about the economic activities of the business. Thus, transactions that can be measured in terms of money are recorded in Accounting. Transactions like the purchase of machinery, payment of salaries, wages, purchase of raw material, sale of goods, etc. all are examples of economic events.
Economic events can be classified as external events and internal events. If a transaction occurs between an outsider and the organization it is termed as an external event like purchases made from suppliers, sales made to customers, etc. When a transaction occurs internally i.e. from one department to another or within the organization then it is termed as an internal event like a supply of raw material to the other department. From the above definitions, it can be inferred that in accounting only transactions of financial nature are recorded.
Financial transactions are those transactions that involve the flow of cash. Accounting is popularly regarded as a communication link between the business and its various users or language of the business. This is because accounting provides important and vital information to its external as well as internal users.
Also, Read What is Accounting?