Definition of Accounting
Accounting may be defined as the systematic process of identifying, recording, classifying, summarising and communicating financial information to users for decision-making. The American Institute of Certified Public Accountants (AICPA) defines accounting as: "the art of recording, classifying and summarising 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."
Thus, accounting is not merely bookkeeping; it is a complete information system that measures business performance, ensures control and supports planning.
Process / Functions of Accounting
The accounting process consists of several interconnected stages that convert raw financial data into meaningful information:
- 1. Identifying Transactions: Determining which business activities are financial in nature and measurable in monetary terms.
- 2. Recording (Journalising): Entering transactions chronologically in the journal using double-entry system.
- 3. Classifying (Posting to Ledger): Transferring journal entries to ledger accounts to group similar transactions together.
- 4. Summarising: Preparing trial balance, trading account, profit & loss account and balance sheet to summarise financial data.
- 5. Analysis: Evaluating profitability, liquidity, solvency and performance through ratios and comparative statements.
- 6. Interpretation: Explaining the results to management, investors and other stakeholders for better decisions.
- 7. Communication: Presenting financial statements and reports to interested parties.
Together, these steps make accounting a complete information and decision-support system.
Objectives of Accounting
The major objectives of accounting are as follows:
- 1. To Maintain Systematic Records: Ensures all transactions are recorded properly for future reference.
- 2. To Ascertain Profit or Loss: Through the preparation of Trading and Profit & Loss Account.
- 3. To Show Financial Position: Balance Sheet reflects assets, liabilities and capital at a given date.
- 4. To Provide Information for Decision Making: Helps management in planning, controlling and evaluating business operations.
- 5. To Assist in Financial Planning: Provides data for budgets, forecasts and long-term strategies.
- 6. To Protect and Guard Business Assets: Accounts provide a check on misuse of assets through internal control systems.
- 7. To Provide Evidence in Court: Books of accounts can act as legal proof.
- 8. To Meet Legal Requirements: Compliance with taxation laws, corporate laws and regulatory guidelines.
Advantages of Accounting
Accounting offers several benefits that support the functioning and growth of a business:
- 1. Provides Complete and Systematic Records: Prevents errors, omissions and confusion.
- 2. Facilitates Comparison: Helps compare results of different periods and with other organisations.
- 3. Helps in Decision-Making: Provides financial insights required for investment, expansion or cost control.
- 4. Ensures Control Over Assets: Detects fraud, leakage or inefficiency.
- 5. Helps in Determining Tax Liabilities: Assists in correct assessment of GST, income tax, etc.
- 6. Acts as Legal Evidence: Proper records serve as documentary proof in disputes.
- 7. Facilitates Raising Loans: Banks rely on audited financial statements to grant credit.
- 8. Supports Future Planning: Helps forecast sales, costs and capital needs.
Conclusion
Accounting plays a fundamental role in every business organisation. It not only records transactions but also analyses and interprets financial information for better decision-making. With its structured process, clear objectives and numerous advantages, accounting acts as the backbone of financial management and business control.