Meaning of Accounting :
Accounting is often called the language of business. Just like a language helps people communicate with each other, accounting helps businesses communicate their financial information to different people.
The main purpose of accounting is to provide financial information about a business so that users of this information can make correct and logical decisions. These users may include business owners, investors, managers, banks, government authorities and many others.
Accounting works through a systematic process. It records business transactions, classifies them into different categories and finally summarizes them in the form of financial statements.
This process mainly includes three steps:
-
Recording – Writing down all financial transactions that happen in the business.
-
Classifying – Grouping similar transactions together.
-
Summarising – Preparing financial statements that show the overall financial performance of the business.
After completing these steps, accounting prepares two important financial statements:
1. Profit and Loss Account
The Profit and Loss Account shows the result of business operations during a specific period. It tells whether the business has earned profit or suffered loss.
Example (Real Life):
Suppose a shopkeeper sells goods worth ₹1,00,000 in a month and his total expenses are ₹80,000.
The remaining ₹20,000 will be the profit, which will be shown in the Profit and Loss Account.
2. Balance Sheet
The Balance Sheet shows the financial position of the business at a particular date. It includes three important elements:
-
Assets – Things owned by the business (cash, furniture, building etc.)
-
Liabilities – Amounts the business has to pay to others (loans, creditors etc.)
-
Capital – Owner’s investment in the business
Example (Real Life):
If a business owns furniture worth ₹50,000 and cash of ₹20,000, and has a loan of ₹30,000, the Balance Sheet will show the assets and liabilities to represent the financial position of the business.
Definitions of Accounting :
Different experts and organizations have defined accounting in different ways. Some important definitions are explained below.
(1) Definition by R.N. Anthony
According to R.N. Anthony, nearly every business organization uses an accounting system. Accounting helps in collecting, summarizing, analyzing and reporting financial information related to business activities.
In simple words, accounting gathers financial data and presents it in a way that helps people understand the financial condition of the business.
Example (Real Life):
A company records all its sales, purchases and expenses during the year. At the end of the year, accounting helps summarize this information into reports that managers and investors can study.
(2) Definition by American Institute of Certified Public Accountants (AICPA)
According to the AICPA, accounting is the art of recording, classifying and summarizing financial transactions and events in terms of money. It also involves interpreting the results of these transactions.
This means accounting not only records financial information but also explains what the results mean for the business.
Example (Real Life):
A company records all sales and expenses during the year. After preparing financial statements, accountants analyze them to determine whether the business is performing well or not.
Modern View of Accounting
Earlier, accounting was mainly used for record keeping. Businesses only maintained records of transactions.
However, over time the role of accounting has expanded. Today, accounting is considered an information system that provides useful information to various users such as:
-
Shareholders
-
Potential investors
-
Creditors
-
Banks and lenders
-
Customers
-
Government and income tax authorities
These users rely on accounting information to make important financial decisions.
Example (Real Life):
Before giving a loan to a company, a bank studies the company’s financial statements prepared through accounting. This helps the bank decide whether the company can repay the loan or not.
(3) Definition by American Accounting Association (AAA)
The American Accounting Association defines accounting as:
“The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information.”
This definition highlights three main functions of accounting:
-
Identifying financial events
-
Measuring them in monetary terms
-
Communicating the information to users
Example (Real Life):
If a company buys machinery worth ₹5,00,000, accounting identifies this event, records it in money terms, and communicates it through financial statements.
(4) Definition by Smith and Ashburne
According to Smith and Ashburne, accounting is both a science and an art.
-
It is a science because it follows systematic rules and principles.
-
It is an art because it requires skill in analyzing and interpreting financial information.
Accounting involves recording transactions, preparing summaries, analyzing results and communicating them to people who need the information for decision-making.
Example (Real Life):
A financial manager studies the accounting reports of a company to decide whether the business should expand, reduce expenses, or invest in new projects.
✅ In simple words:
Accounting is a systematic process of recording, classifying, summarizing and interpreting financial transactions to provide useful information for decision-making.