Financial Accounting

What is Accounting and Its Definition

what is accounting

What is an accounting & Its Definition

According to (AICPA) American Institute of Certified Public Accountants, “Accounting is an 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 a financial character and interpreting the results thereof.”
According to A.W.Johnson, “Accounting may be defined as the collection compilation and systematic recording of business transactions in terms of money, the preparation of financial reports, the analysis and interpretation of these reports and the use of these reports for the information and guidance of management.”
 Accounting can be defined as bookkeeping of every business transaction having monetary value according to the rules and regulation, as per their nature of the account. Then summarize them with closing balance in every fiscal year in the shape of prescribed and required format for internal and external users. This will helps for decision making of management and third parties.
Accounting has a wide range, it starts by occurring the transaction to decision making on it. Three major types of accounting come into existence.

Explanation of Accounting Definition

  • Recording

 The first Step of that process, start with every monetary value transaction, purely made for a business entity. It is also called bookkeeping. In this stage account maintain the books of account, like Day book, ledgers, Cash Registers, Vouchers etc. its depend upon the organization which system they used, whether Single Entry System Or Double Entry System. The transaction should be recorded timely after the occurrence.

• Classification

In this Stage, Golden Rules of Accountancy are followed while recording the transactions as per the nature of the account. In simple words, every transaction has at least one Debit and one Credit value with the division of equal value in both opposite natures of columns. What will be debited and what will be credit. Debit and Credit of accounts should be as per rules. This is called Classification of a transaction. All financial and analysis reports are prepared, based on classification.

• Summarizing and Reporting

 Third Stage is preparing the financial reports at the end of every fiscal year, for example, Profit and Loss Account, Balance Sheet, notes to the financial statement, cash flow stamen and statement of Shareholder Equity. Before summarizing it you should confident that all journal Entries are free from errors and according to the debit and credit  or golden rules of accounting.

• Analyzing

 It’s the last stage of accounting in which analyzed all the business data and information on based of summarized data and also final the final decisions of business. Management must find out its positive and negative points. Accounting helps in doing so by means of comparison. It is common practice to compare profits, cash, sales, assets, etc with each other to analyze the performance of the business.
Example for Accounting Definition.
A Business entity (Company) has purchased assets having value of $4000, Paid $300 as cash and $100 on credit for one week from XYZ Co dated 30 December. Company fiscal year ended on 31 Dec.
  • When accountant updates the day books and ledgers it will be called recording of the transaction.
  •  $400 debited with Assets, $300 credited with cash and $100 XYZ Co. This is called classification. Account should be charged as per their chart of accounts.
  • In financial reports, when accounts will be closed and balance sheet updated with closing balances of ledgers, assets will increased with $100 and liability also with $100. Cash is also assets, so the net effect is $ 100 ($400- $300).
  • Then Analysis will be made on financial reports how much increase in assets and liabilities.

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