What is Accounting?

Being known as “The Language of business”, accounting is the basic need of a business organization to find out where it stands.

According to American accounting association, accounting has been defined as,

The process of identifying, measuring, and communicating information to permit judgment and decision by the users.

Yet another definition of American Institute of Certified Public Accountants (AICPA) is that

Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof.

Accounting entails recording, classifying and summarizing of business transactions.

It is a process of identification, measurement and communication of economic information involving four interconnected phases.

Accounting Process

They are outlined herein: At the outset, the first phase is meant to record the economic events or transactions -depending upon their occurrences, chronologically in the books of accounts - called journals. This process is known as journalizing.

Next comes the phase of ledger-posting: It is the process by which all the transactions are synthesized account-wise so that the accumulated balance of each of those accounts can be determined. The process of ledger posting is vitally important as it helps in ascertaining the net effect of various transactions during a given period.

The subsequent stage is preparing the trial balance which involves the arrangement of all ledger accounts having been aggregated into debit and credit balances. This activity enables to check and confirm whether the total of debits is equal to that of credits.

Finally, comes the phase of preparing financial statements. This phase is meant for finalization of accounts by measuring profit & loss account and preparing Balance Sheet- at the end ofaccounting period.

Why do we need accounting?

Every business needs to have two prime objectives, such as, to earn profit and to remain solvent and the information in relation to these objectives while ensuring whether they are being accomplished is provided by accounting.

Accounting is important in the sense that it enables a business house to maintain complete and orderly prepared records of economic events by way of preparing books while facilitating the information for various purposes.

Furthermore it helps to ascertain the net results in terms of profit or loss (Income Statement) and providing the information about financial position of the business (Balance Sheet) to the owners of a business relating to what the entity owns in the form of assets and what it owes in the form of liabilities at a particular point of time.

Accounting information is valuable to the concerned managers too so as to ensure whether the business entity is being directed as it should be, and simultaneously it is a means to provide the information to the investors to find out the future prospects ofbusiness.

It is also useful for the employees and customers in order to know the condition of the business entity.

Accounting is the basis and of a great assistance to management for planning, controlling and decision making process. It is with the help ofaccounting information that the performance of an entity can be appraised, at the same time as, its methodical records make possible to eliminate the frauds and the thefts.

Furthermore, being concerned primarily with the creation of financial information for its users, accounting provides useful information for ascertaining the effectiveness and efficiency of a business. Hence, accounting is must for every business. Exclusive of accounting leads to create chaos and discrepancies in business transactions.