What is accounting?
Accounting is a financial recording and reporting system (see Figure 1).
Accounting identifies and classifies financial transactions; it then summarises these financial transactions into financial reports. Financial reports communicate relevant financial information to interested persons called stakeholders. This information allows stakeholders to decide how to best use the economic resources of the accounting entity (that is, the business or enterprise).
Figure 1 The accounting system
Definition of accounting
Here is a simple definition:
Accounting is a system that provides numeric information about the finances of an accounting entity.
Here is another definition:
Accounting is the systematic recording, reporting and analysis of the financial transactions of a business.
Yet another definition is as follows:
Accounting is a tool for recording, reporting and evaluating—in monetary terms—the transactions, events and situations that impact on an enterprise.
The American Accounting Association defines accounting as: the process of identifying, measuring and communicating information to permit judgment and decision by users of accounts.
An even simpler definition is this: accounting is the language of business.
- Accounting is a system that operates for as long as the accounting entity exists.
- Accounting is interested only in the financial or monetary transactions of the accounting entity.
- The first phase of accounting is to identify, collect, measure, classify and record financial transactions; a second phase is to calculate, summarise, report and evaluate financial information.
- The intent of accounting is to communicate the financial information of the accounting entity to decision makers.
- Accounting deals with maintaining and storing financial results.
Accounting is not an end in itself. It is not, like art in a museum, to be displayed as a ‘beautiful set of numbers’ (even if you hear businesspeople speaking this way). Accounting is primarily a means to an end. This means that accounting is a process.
Accounting provides the most relevant and reliable financial information possible so that the real work of an accounting entity (for example, a business) can be done. The real work is to make the best possible decisions about how to use the economic resources of the entity.
Summary—definition of accounting
Based on the above definitions and conclusions, accounting can be divided into two broad elements:
1. Accounting is an information process that identifies, classifies and summaries the financial events and transactions that impact on a business.
2. Accounting is a reporting system that communicates relevant financial information to interested person (stakeholders). This information allows stakeholders to assess performance, make decisions about and/or control the economic resources of a financial entity.