What is accounting?

Accounting is something which affects every individual in every part of this life, be it buying grocery from the market, or be it purchasing a book online. However all individuals do not record their day-to-day transactions, but organizations do.

 

Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgments and decisions by users of the information.

 

This definition may appear short but it has been widely quoted over a number of years and is sufficient to specify the entire contents of this introductory textbook. Taking the definition word by word, it leads to the following questions:

  1. What is the process?
  2. How is financial information identified?
  3. How is financial information measured?
  4. How is financial information communicated?
  5. What is an entity?
  6. Who are the users of financial information about an entity?
  7. What types of judgments and decisions do these users make?

 

Recording Accounting Data

When it comes to accounting, people consider it as used by business and organizations. Businesses and organizations cannot keep and handle the accounting activities and data in their mind and thus must record it in a proper way.

 

Classifying and Summarizing Accounting Data

First the data is recorded in a proper manner, must be organized so as to be most useful to the business.  Doing such classifying and summarizing of accounting records, it will become easy to workout profit or loss has been made by the business in a particular period of time.  Business can also find the resources are owned and what is owed by it in a particular period of time.

 

Communicating Accounting Information

By recording and classifying accounting data, those have skilled in the accounting should be able to tell whether business is performing well or not and what are the strengths and weaknesses of the business. Finally they will be able to communication and share information with the business owners and other stakeholders. Therefore, accounting is

1.       Recording of data

2.       Classifying and summarizing of data

3.       Communicating accounting information

 

Writing the questions in this order is slightly dangerous because it starts by emphasizing the process and waits until the final question to ask about the use of the information. The danger is that accountants may design the process first and then hope to show that it is suitable to allow judgments and decisions by users. This is what has often happened over many years of developing the process by accountants.

 

In order to learn about, and understand, accounting by taking a critical approach to the usefulness of the current processes and seeing its limitations and the potential for improvement, it is preferable to reverse the order of the questions and start by specifying the users of financial information and the judgments and decisions they make. Once the users and their needs have been identified, the most effective forms of communication may be determined and only then may the technical details of measurement and identification be dealt with in a satisfactory manner.

 

 

Users of accounting information

Users Following may be possible users of accounting information

Business owners:

Owners want to be in picture whether their business is profitable or not and what financial resources they have.

 

A Prospective Buyer

If the owner is interested to sell the business the buyers must have the due rights to access the all financial information.

 

Financial Institutions

When the businesses are in need to borrow money they must share concern financial information to banks and financial institutions

 

Governmental Agencies

Different Government Agencies like Tax Department need financial information to calculate the taxes.

 

Both Internal users those inside the business and External users those outside the business have interest in financial information of a business. One thing is certain, without proper recording accounting data it will be difficult to communicate the information prospective users and stakeholders.

 

2 responses

  1. […] What is accounting? « relivingmbadays Comments […]

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