What is Accounting, and, Definition

What is Accounting, and, Definition accountingrevenue.com/what-is-accounting-and-definition.html Sanjoy19

July 6, 2020

Meaning of accounting: It is not possible for human beings to remember all events which occur at different times and at different places. But for solving day-to-day financial problems, knowledge of past and present economic activities become necessary. In other words, whenever any transaction involves any monetary dealings, ‘counting’.The term accounting’ has originated from the concept of ‘counting’.The need of communicating information and presenting a clear picture of the financial transactions led to the emergence of Accounting.

It is the practical application of Accounting. It provides financial information on the basis of which the persons utilizing such information can take decisions regarding the allocation of economic resources.

It comprises (a)a system of writing financial transactions and (b) a system of recording, classifying, summarizing, and presenting periodical reports in monetary terms.

It is an art that helps the users to achieve their goals. If follows a systematic manner.

The accounting records and their results are presented in terms of money. The presentation has to be meaningful and useful and it depends on the nature and size of the business.

At present, accounting is considered as a service activity. It aims at (1)revealing the profit/loss or surplus/deficit of a concern in an accounting period and (2)revealing its assets and liabilities at the end of the period.

The reporting requires summarization and classification of business activities. Thus it starts with the process of recording, classifying and summarising financial data and ends with the finalization, interpretation, and presentation of the end-results.

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What is Accounting, and, Definition

Some Important Definitions : 1.The American Institute of Certified Public Accounting : (A.I.C.P.A) committee on terminology proposed in 1941 that Accounting be defined “the art of recording, classifying and summarizing in a significant manner and in terms of money, transaction and events which are in part at least, of a financial character and interpreting the results thereof.”

2.Taylor & shearing: “Accounting may be defined as the art and science of recording business transactions in a methodical manner so as to show:(a) the true state of affairs of a business of a particular period of time and (b) the surplus or deficiency which has accrued during a specific period.”

3.C.A Smith & J.G Ashbourne : “Accounting is the science of recording and classifying business transactions and events primarily of a financial character, and the art of making significant summaries, analysis and interpretation of those transactions and events and communicating the results to persons who must make decisions or form judgments.”

4.R.N. Mukherjee :

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“The term ‘Accounting’ refers to a discipline that provides financial information on the basis of which users of the said information that decisions about the allocation of economic resources.”

5.N.L Hingorani, A.r.Ramanathan and T.S.Grewal, “a tool designed to help master our economic struggle.”

6.Hrishikesh Chakrabvrty: “Accounting is the science of recording, classifying and summarising transaction (i.e.changes in financial set up) so that relation with outsiders is exactly determined and result of operation during a particular period can be calculated, and the financial position as at the end of the period may be known.”

7.The American Accounting Association (A.A.A): “The process of identifying, measuring and communicating economic information to informed judgments and decisions by the users of information.”

AICPA once again defined accounting in 1970 in the following words“Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature about economic activities that are intended to be useful in making economic decisions.”

Traditional Definition : In 1961, The American Institute of Certified Public Accountants (AICPA) has defined the financial accounting in the following way which was widely quoted for many years.”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.”

Modern Definition : In 1966, The American Accounting Association Association (AAA) has defined accounting in the following way by highlighting the broader perspective of accounting.

“Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.

In 1970 the American Institute of Certified Public Accountants (AICPA) has redefined the ‘Concept of accounting with particular reference to the concept of information. ‘”Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”

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Later on, the purpose of accounting has been thoroughly updated and changes their direction towards social welfare. Accordingly, in the year 1975, the American Accounting Association Association (AAA) has redefined accounting as, “to provide information which is potentially useful for making economic decisions and which, if provided will enhance social welfare.”

Therefore, Accounting is a discipline that is not merely restricted to the private use of information like recording, Classification, Summarization, and Interpretation of financial information about the activities of a concern but it has also been redesigned for the welfare of the society.

Brief History of the origin of Accounting : Accounting in its initial stage was confined to mere record keeping. If we look back to the blurred pages of history, we find its existence in the form of record-keeping in the ancient Egyptian, Babylonian, Vedic, Greek, and Roman civilizations.

Ancient Egypt applied record-keeping is storehouses between 3000 B.C and 1000 B.C.The deposits of gold and other properties of the country would be stored, counted, and recorded there.

Almost at the same time, the Babylonians used clay tablets for counting and recording.”Zenon Papyri”, an old Egyptian document, the Parthenon treasury of sacred valuables in Greece, etc, gives ample evidences that the Greeks and the Egyptians knew the application and uses of vouchers and were familiar with the concept of accounting information even before the birth of Jesus Christ.

Accounting historians could not collect adequate information about the Romans. But the missing track still shows that wax tables would be used for record-keeping in Rome even during 4000 B.C.The Romans knew the use of Day Books of recording receipts and payment and the cash ledger.

The Vedic civilization clearly shows that a separate group of people called Vaishyas would discharge business activities, Kautilya’s Artha Sastra written during the regime of Chandragupta Maurya, bears proofs that a system of accounting was prevalent in India.

Kautilya described 40 kinds of fraud and embezzlement. Our very old Manu Samhita, the Geeta, etc, contain verses or slokas of indicating that the ancient Indians had concepts of accounting and profit much ahead of the people of other countries. The Guptas knew the technique of charging tax on profits.

Double Entry System of Book-Keeping was found to exist in Genoa. Venice in 1340. In his book “Origin and Evolution of Double Entry Book Keeping” E.Peragallo said that”the first known books of accounts kept on double-entry principles were those of Massari of Genoa.”It was probably the first complete works. Historical records show that the idea evolved even earlier[like the works of Giovanni Forolfi Between 1299 to 1300].

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In 1494 Luca Fra Pacioli, a Franciscan monk and a great philosopher hailing from Sansepolcro, Italy, published for the first time the systematically arranged techniques of double entry system in his famous works “Summa de Arithmatica Geometria Proportionality.

“In this review of Arithmetic, Geometry, and Proportions he brought out a chapter “Particulars de computis et seripturis”, that is, particulars of Reckonings and their Recordings. He used the terms”Debits” and “Credits” from which the modern concepts of “Debit” and “Credit” are inherited.

Pacioli suggested the uses of (i) Memorial or Day Book for recording transactions with explanations in chronological orders,(ii) Journals for recording debits and credits in terms of money, and (iii)Ledger. He stressed on the ides of measuring periodical profit or losses and preparing inventory from which the modern concept of Balance sheet emerged.

This system gradually spread over other parts of Europe. A German mathematician Schreiber published principles of bookkeeping in 1543. Hugh Oldcastle published his book on the Double Entry System of Accounting in the English language in 1543.

In 1588 the second book in English came out in England with additions and further explanations. Pacioli did not take into account the accrued incomes or expenses. Prior to the 18th Century Code Napoleon was being followed to record all transactions in Journals.

The great Industrial Revolution left a great impact on accounting. The British system came to recognize the importance of Ledger Posting and Sub-division of Journals.

In the words of J.A.Feathers'”people found it useful to know to what extent their income had exceeded their expenditure and with the introduction of credit into the business, they also wanted to know how much money was owed to them by their various customers.”

During the post World War II period, the development of accounting took its peak and spread over sub-fields like Cost Accounting, Management Accounting, Social, Human Resource, etc.

Accounting Societies were set up in different countries to give directives and recommendations regarding accounting procedures.Accounting became dynamic and developing with new concepts and ideas creeping in. Its process of development is still going on. Accounting standards at the international and national levels have been set up.

Nature: i.Man-made System.

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ii. Accounting is a Process. iii.Accounting is an Art. iv.Monetary Events. v.Accounting is a means and not an end.

Function : The most important functions. i.Recording and Classification of Transaction. ii.Reflecting the Financial Results. iii. Reflecting the financial position. iv. Communicating Financial Information.

Objective : 1.Maintaining systematic Records of Transactions.

2.Ascertaining Profit or Loss.

3.Ascertaining Financial Position.

4.assisting the management.

Communication Accounting Information to Users.

Type/Branches : a. Financial . b. Cost . c. Management . d. Human . e. Social . f. Environmental. g. Forensic .

Advantages : 6/7

1.Financial information about Business.

2.Assistance to management.

3.Replaces memory.

4.facilitates Loan.

5.Assistance in the Event of Insolvency.

6.Helpful in Partnership Accounts.

Limitations : Same inportant limitations : 1.Accounting is not Fully Exact.

2.Accounting does not Indicate the Reliable Value.

3.Accounting ignore the Qualitative Elements.

4.Accounting Ignores Effect of Price Level Changes.

5.Accounting may lead to Window Dressing.

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