What is Accounting?

Definition of Accounting

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Accounting is the art and science of identifying, recording and classifying financial transactions and events, and then summarizing, analysing and interpreting there results to people who make decisions or form judgements.

Accounting is also called language of business because this is the language which is used to communicate any financial information

Functions of Accounting

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Following are the four primary functions of accounting:

1. Identifying:  The first function is to identify whether the transaction can be measured in terms of money or not.
2. Recording:    Once the transactions are identified in terms of money, the second function of accounting is to record that transaction in the books on account i.e. called “Journal”.
3. Classifying:    After the transaction are recorded in the books on account, it need to be classified so that summarizing them becomes easy. So the third function of accounting is to classify the transactions i.e. grouping the transactions based on their nature in a special book called “Ledger”.
4. Summarising: The last part of accounting is to present the classified data in a format which could be easily understood and result can be interpreted there off. So this process involves preparation on Trial Balance and then preparing Profit and Loss and Balance Sheet which represents the performance of any entity.

Classification of Accounting 

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Accounting is classified in three broad categories:

1. Financial Accounting: Financial Accounting is that part of accounting which is mainly concerned with the historical, custodial and stewardship aspects of external reporting to shareholders, government and other users of accounting information outside the business entity.
2. Cost Accounting: Cost Accounting is that part of accounting which is concerned with the accumulation and assignment of historical costs to units of product and departments, primarily for the purpose of valuation of stocks and measurement of profits.
3. Management Accounting: Management Accounting is that part of accounting which is concerned mainly with internal reporting to the managers of a business unit.

Users of Accounting Information 

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Following are the main users of accounting information:

• Shareholders
• Security analysts
• Banks
• Rating Agencies
• Managers
• Employees
• Suppliers
• Customers
• Government
• Regulators
• TV channels and newspapers