Definition of Accounting: Accounting is used by business entities for keeping records of their monetary or financial transactions. A businessman who has invested money in his business would like to know whether his business is making a profit or incurring a loss, the position of his assets and liabilities and whether his capital in the business has increased or decreased during a particular period.
Definition of Accounting
The definition given by the American Institute of Certified Public Accountants (‘AICPA’) clearly brings out the meaning of accounting. According to it, accounting is “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 a financial character and interpreting the results thereof”. The definition brings out the following as attributes of accounting :
The Committee on Terminology set up by the American Institute of Certifed Public Accountants formulated the following defnition of accounting in 1961:
“Accounting is the art of recording, classifying, and summarising in a signifcant manner and in terms of money, transactions and events which are, in part at least, of a fnancial character, and interpreting the result thereof.”
Definition by the American Accounting Association (Year 1966):
The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of accounting‖.
Meaning of Accounting
(i) Accounting is an art. Accounting is classified as an art, as it helps us in attaining our aim of ascertaining the financial results, that is, operating profit and financial position through analysis and interpretation of financial data which requires special knowledge, experience and judgment.
(ii) It involves recording, classifying and summarizing. Recording means systematically writing down the transactions and events in account books soon after their occurrence. Classifying is the process of grouping transactions or entries of the same type at one place. This is done by opening accounts in a book called ledger. Summarizing involves the preparation of reports and statements from the classified data (ledger), understandable and useful to management and other interested parties. This involves preparation of final accounts namely profit and loss account and balance sheet.
(iii) It records transactions in terms of money. All transactions are recorded in terms of common measure i.e. money which increases the understanding of the state of affairs of the business.
(iv) It records only those transactions and events which are of financial character. If an event has no financial character then it will not be capable of being measured in terms of money ; it will not be, therefore, recorded.
(v) It is the art of interpreting the results of operations to determine the financial position of the enterprise, the progress it has made and how well it is getting along.
As per this defnition, accounting is simply an art of record keeping. The process of accounting starts by frst identifying the events and transactions which are of fnancial character and then be recorded in the books of account. This recording is done in Journal or subsidiary books, also known as primary books. Every good record keeping system includes suitable classifcation of transactions and events as well as their summarisation for ready reference. After the transactions and events are recorded, they are transferred to secondary books i.e. Ledger. In ledger, transactions and events are classifed in terms of income, expense, assets and liabilities according to their characteristics and summarised in proft and loss account and balance sheet. Essentially the transactions and events are to be measured in terms of money. Measurement in terms of money means measuring at the ruling currency of a country, for example, rupee in India, dollar in U.S.A. and like. The transactions and events must have at least in part, fnancial characteristics. The inauguration of a new branch of a bank is an event without having fnancial character, while the business disposed of by the branch is an event having fnancial character. Accounting also interprets the recorded, classifed and summarised transactions and events.
However, the above-mentioned defnition does not refect the present day accounting function. The dimension of accounting is much broader than that described in the above defnition. According to the above defnition, accounting ends with interpretation of the results of the fnancial transactions and events but in the modern world with the diversifcation of management and ownership, globalisation of business and society gaining more interest in the functioning of the enterprises, the importance of communicating the accounting results has increased and therefore, this requirement of communicating and motivating informed judgement has also become the part of accounting as defned in the widely accepted defnition of accounting, given by the American Accounting Association in 1966 which treated accounting as
“The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of accounts.”
In 1970, the Accounting Principles Board (APB) of American Institute of Certifed Public Accountants (AICPA) enumerated the functions of accounting as follows:
“The function of accounting is to provide quantitative information, primarily of fnancial nature, about economic entities, that is needed to be useful in making economic decisions.”
Thus, accounting may be defned as the process of recording, classifying, summarising, analysing and interpreting the fnancial transactions and communicating the results thereof to the persons interested in such information.