Accounting Definition

Technical definitions of accounting have been published by different accounting bodies. The American
Institute of Certified Public Accountants (AICPA) defines accounting as:

the 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 financial character, and
interpreting the results.
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.
Though I am not a fan of technical definitions, I believe that studying the statement above will give us a
better understanding of accounting.

1. Accounting is considered an art

Accounting is considered an art because it requires the use of skills and creative judgment. One has to be
trained in this discipline to be able to perform accounting functions well.
Accounting is also considered a science because it is a body of knowledge. However, accounting is not an
exact science since the rules and principles are constantly changing (improved).

2. Accounting involves interconnected "phases"

Recording pertains to writing down or keeping records of business transactions. Classifying involves
grouping similar items that have been recorded. Once they are classified, information is summarized into
reports which we call financial statements.

3. Concerned with transactions and events having financial character

For example, hiring an additional employee is qualitative information with no financial character. Hence, it
is not recorded. However, the payment of salaries, acquisition of an office building, sale of goods, etc. are
recorded because they involve financial value.

4. Business transactions are expressed in terms of money

They are assigned amounts when processed in an accounting system. Using one of the examples above, it is
not enough to record that the company paid salaries for April. It must include monetary figures say for
example, $20,000 salaries expense.

5. Interpreting the results

Interpreting results is part of the phases of accounting. Information is useless if they cannot be interpreted
and understood. The amounts, figures, and other data in the financial reports have meanings that are useful
to the users.
By studying the definition alone, we learned some important concepts in accounting. It also gave us an idea
of what accountants do.

You may not notice but the simple things you do and encounter everyday can actually be related to some
level of accounting. You make budgets, count change and check the receipts from the supermarket. You may
also have listed things you spent your money with at one point in your life.
We are surrounded by business from managing our own money to seeing profit statements of big
corporations. And where there is business, there sure is accounting.
Accounting function consists of following five types of activities:
1. Collection and recording of data.
2. Classification of data
3. Processing of data including calculating and summarising
4. Maintenance or storage of results
5. Reporting of results
Accounting serves many purposes. It is broadly divided in three types according to the purpose served by it.
These three types of accounting are:
1. Basic accounting
2. Management Accounting
3. External Accounting
Basic accounting, also called Bookkeeping, represents the earliest application of accounting. It serves the
purpose of facilitating the operating activities of an enterprise involving financial transactions. For example
to determine the money to be paid to suppliers, or to be collected from customers.
The information available from the basic accounting can be further analysed and presented to management
of a firm to help them in their planning and controlling functions. This is the function served by
management accounting.
With advent of large corporation the ownership of companies got separated from management, and a need
arose for providing information on activities and performance of companies to shareholder and other
stakeholders outside the company, not involved in direct operation or management of company. External
accounting meets the need for this type of external accounting