What is Accounting?

Accounting is often characterized as “the language of business”. Because of the wide range of accounting activity, as concise yet all-inclusive description of accounting is difficult to devise. Accounting is concerned with processes of recording, sorting, and summarizing data resulting from business transactions and events. The data are to a large extent but not exclusively of a financial nature, and are frequently but not always stated in monetary terms. Accounting is more than this, however, its involvement with preparation of reports and interpretation of the data is of often grater significance. Accounting has been defined rather broadly as:

…the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.

Implicit in this definition is the necessity of recording the economic information that is to be measured. An understanding of the kinds of information to be accounted for and their manner of recording must be acquired before the student can advance very far into the area of effective communication.

Without exploring in detail the characteristics of economic information, it is sufficient at this point to indicate that it includes financial information about business transaction. Much of the “raw-material” with which accounting deals is composed of business transaction data, expressed in terms of money. The recording of such data may take various forms, such as writing by pen or pencil, printing by various mechanical and electronic devices, or holes or magnetic impressions in cards or tape.

The mere records of transactions are of little use in making “informed judgments and decisions”. The recorded data must be sorted and summarized before significant reports and analyses can be prepared. It is not the single business act but the sum of all the operations of a day, week, month or year that has significance. Some of the reports to enterprise managers and to others issued only at longer intervals. The usefulness of reports is often enhanced by analyses, such as percentages and ratios, and comparisons between different dates or periods of time. The trends and other significant developments in the affairs of an organization set forth in various reports are, in a general sense the “end-product” of accounting.