What is accounting?

Accounting is the process of recording, reporting and interpreting financial information pertaining to an organization.

According to American Institute of Certified Public Accountants:

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

If we analyse this definition, we get the following components:

  • It is about recording transactions
  • Transactions should be only of financial nature
  • The recorded transactions are then classified according to set rules
  • Results are then interpreted for people who are interested in this information



Difference between Book-keeping and Accounting

Book keeping is mainly concerned with record keeping or maintenance of books of account. It includes identifying the financial transactions, measuring them in terms of money, recording them in the books of original entry and then classifying them into ledger.

Accounting is more than Book-keeping. Apart from the standard practices of Book-keeping it involves summarizing the classified information in the form of Profit and Loss Account and Balance Sheet, drawing meaningful information from them and communicating this information with the interested parties i.e. stakeholders.

 

‘Booking keeping’ is a part of accounting as it only involves recording of economic events.


Purpose of Accounting

The main purpose of accounting is

  • To keep a systematic record of business transactions
  • To calculate Profit and Loss
  • To ascertain the financial position of the business
  • To provide financial information to different users of this information.

Who are users of accounting information?

These stakeholders or users might include

  • Owner/Shareholders: How much profit?
  • Managers: How business performed and how they can improve the performance in future
  • Employees: To know the profits so that they could demand better wages?
  • Investors: Is it safe and profitable to invest in the business?
  • Suppliers: Will the business be able to pay for their supplies?
  • Government: How much tax should be collected?
  • Lenders: It is safe to lend money to the business?

Types of Accounting

Financial Accounting: It is about recording business transactions in a systematic manner, to ascertain the profits or losses of the business by preparing Profit and Loss Account and Balance Sheet.

Cost Accounting: It involves finding out the total cost and unit cost of goods and services produced by the business.

Management accounting: Accounting table and formats may not make sense to a person other than an accounting. This is where Management accounting comes in. It is presenting the accounting information in a manner which a layman manager could understand. It involves ratio analysis, budgets, cash flows etc.
We will be covering some parts of Management accounting in Analysis of Final Accounts section.

New Youtube Channel - ThinkIGCSE

Hi Everyone, I have launched a new YouTube channel with more than a 100 videos on  Economics and Business Studies, tailored specifically for IGCSE and A Level and IBDP students.

Subscribe now and join us on this learning journey: @thinkIGCSE

Exciting News!

IMPORTANT MESSAGE

Quizzes and worksheets on this website have been developed in Flash format. Flash is no more supported by browsers. Therefore, you might see blank pages on some instances. Install Flash player plugin for Chrome from Chrome Web Store. Click here 

Similarly, for other web browsers you will have to activate the relevant flash player plugins.

JOIN OUR ONLINE COURSES

WHO'S ONLINE

We have 766 guests and no members online

Save
Cookies user preferences
We use cookies to ensure you to get the best experience on our website. If you decline the use of cookies, this website may not function as expected.
Accept all
Decline all
Read more
Analytics
Tools used to analyze the data to measure the effectiveness of a website and to understand how it works.
Google Analytics
Our website uses Google Analytics to understand how you interact with our site and improve your browsing experience. These cookies collect information in an anonymous form, including the number of visitors to the site, where visitors have come from, and the pages they visited. The data helps us analyze trends and user behavior to enhance our website's functionality and content.
Accept
Decline
Marketing
Set of techniques which have for object the commercial strategy and in particular the market study.
Marketing
Our website uses Google marketing cookies to deliver personalized ads and measure the effectiveness of our advertising campaigns. These cookies track your online activity to help us show you relevant ads on Google services and partner websites.
Accept
Decline