What is ACCOUNTING ?

What is accounting?

          Accounting is the language through which we can understand a business.

According to American Institute of Certified Public Accountants --

  “Accounting is an 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 result thereof.”

Recording: initial transactions recorded in the books of prime entry.

Classifying: transactions in the books of prime entry are classified in similar groups called ledger accounts.

Summarizing: summarizing the ledger accounts into trial balance and then to final accounts.

Why do we need accounting?

          At the end of a financial year, businessmen and a companies stakeholders will want to know about the business. So for the purpose of understanding it, we need to account all the financial transactions taking place in the business.

How do we account financial transactions?

          For recording financial transactions, all businesses maintain books of prime entry. These are the records where day to day transactions are recorded. [Examples of books of prime entry are: purchase day book, sales return day book, journal, cash book, petty cash book etc.]

After that, ledger accounts are prepared. Ledger accounts summaries all the individual transactions from the books of prime entry. They are classified in groups, chronological order and in cumulative totals. They follow the system of double entry.

After that, a trial balance is prepared to check the arithmetic accuracy of the ledger accounts. The credit side and the debit side of the trial balance should be equal. But this does not mean that the accounts are free from error. There can be errors which cannot be detected with the help of the trial balance [like errors of principle, compensating errors]. If they do not balance it means that there are some more errors in the ledger accounts [like error of transposition, errors of omission, and errors of commission].

After all this processes comes the preparation of the financial statements. Financial statements include the Profit and Loss account/Income statement, Balance Sheet/Statement of Financial position and the Cash flow statement. Financial statements are prepared at the end of a financial year or once in every six months.

 

Conclusion

           Accounting helps financially literate personals to understand and make decisions regarding the future of the business and help its stakeholder receive the required information for their decision making.

 

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