Definition and Explanation of Accounting:

Learning Objectives:

1. Define and explain accounting.

2. What are the main functions of accounting?

Accounting is defined as "the art of recording, classifying and summarizing in terms of money transactions and events of a financial character and interpreting the results thereof."

An analysis of the definition of accounting brings the following functions of accounting.

Recording:

This is one of the basic functions of accounting. Recording means to put the transaction to writing in books of accounts. It is essentially concerned with not only ensuring that all business transactions of financial characters are infact recorded but also that they are recorded in an orderly manner. Recording is done in the book - "journal". This book is further subdivided in various subsidiary books such as cash journal, purchases journal, sales journal etc. The number of subsidiary books to be maintained will be according to the nature and size of the business.

Classifying:

Classification is the process of grouping of transactions or entries of one nature at the place. The work of classifying is done in the book termed as "Ledger".

Summarising:

This involves presenting the classified data in a manner which is understandable and useful to management and other interested parties. This involves the preparation of at least two statements: (1) trading and profit and loss account and (2) balance sheet.

Deals with Financial Transactions:

Accounting records only those transactions and events in terms of money which are of financial character. Transactions which are not of a financial character are not recorded in the books of accounts. For example if a company has got a team of dedicated and efficient employees, it is of great use to the business but since it is not of a financial character and capable of being expressed in terms of money, it will not be recorded in the books of the business.

Interprets:

This is final function of accounting. Accounting not only creates data through recording, classifying and summarizing events but also uses them by interpreting. The recorded financial data is interpreted in a manner that the end users can make a meaningful judgment about the financial conditions and profitability of the business operations. The data is also used for preparing the future plans.

You may also be interested in other relevant articles:

1. Definition and Explanation of Bookkeeping

2. Important Bookkeeping Terms

3. Double Entry System of Bookkeeping

4. Single Entry Vs Double Entry System of Bookkeeping

5. Definition and Explanation of Accounting

6. Branches of Accounting

7. Functions of Accounting

8. Parties Interested in Accounting Information

9. Systems of Accounting - Cash System of Accounting and Accrual System of Accounting

10. Bookkeeping Vs. Accounting / Difference Between Bookkeeping and Accounting

11. Accounting Cycle

 

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