Success Roar Classes

Meaning of Accounting

Meaning of Accounts - Success Roar Classes

What is the Need of Accounting?

  1. To keep systematic and complete records of each business transaction. (Meaning of Accounting)
  2. To know the information about the Business-
    • At the end of the year, a businessman wants to know the following-
      • Gain or loss during the year
      • how much amount he is liable to pay and to whom?
      • What are the properties in the business and those values? Etc.
  3. To ensure legal compliances

What is Accounting?

Accounting is the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.”

American Institute of Certified Public Accountants (AICPA)

What are the characteristics of Accounting?

  1. Accounting is an art as well as Science
    1. Science – Science refers to any organized body of knowledge that is founded on specific concepts which are universally acceptable. Accounting is also an organized body of knowledge containing well-defined principles and accounting standards. But it is not an exact science due to changes in these principles and standards from time to time.
    2. Art- Art refers to using creative skills and judgment which differs from person to person. Accounting is also an art because it involves personal judgment and skills.
  2. Recording of Financial Transactions only
    1. Financial Transactions refer to transactions with financial character. This means only those transactions which can be measured and expressed in terms of money and related to the business.
    2. The honesty of employee, a strike by employees, the efficiency of management these are some factors which are important for the growth of the organization but cannot be measured in terms of money.
  3. Recording in terms of money
    1. The transaction in the business will be recorded in monetary terms and in chronological order. For Example, if a businessman sells 10 packets of biscuits of ₹ 5 each, then the sale of ₹ 50 will be recorded not 10 units.
    2. Books to be used to record transactions- Journal or Subsidiary books are used to record the transactions. (Meaning of Accounting)
  4. Classifying-
    1. After Recording transactions, the classification of transactions is done.
    2. Classification of Transactions means the process of grouping the transactions of one nature at one place. The place where one type of transaction is grouped is called an account. The book in which accounts are prepared is called Ledger.
    3. Accounts are opened in a ledger based on the name of a person, expense, income, etc. Ex. Ram’s account, Sales Account, Expense Account, etc.
  5. Summarising-
    1. In summarising the data is presented in an understandable and usable manner. For ex. Calculating and Presenting the result or profit or loss of the year in the Profit and Loss Account.
    2. Here following accounts or statements are prepared –
      • Trial balance– Statement of all account’s balances
      • Trading Account– To know the profit or loss from operating activities of the business
      • Profit and Loss Account– To know profit or loss during the year
      • Balance sheet- To ascertain the financial position of the business
  6. Interpretation
    • It means presenting the financial information in such a manner so the users of such financial information can analyze, interpret and make decisions from such information.
  7. Communication
    • It includes communication of financial information to various users of such financial information ex. Investors, banks, government, etc.

Meaning of Accounting

Process of Accounting

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