Accounting An exposition

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 financial character and interpreting the result thereof’ ’.

Another definition interprets accounting as the process of identifying, measuring and communicating economic information to permit informed judgment and decisions by the user of information.

Let us understand what accounting is all about. Accounting deals with financial transactions of an enterprise. There are many events that may affect the business enterprise. In accounting all such events are not recorded unless these are of financial character. It records transactions and events of financial nature according to generally accepted accounting principles (we shall discuss these principles in the next section). In order that a complete record of financial transactions of a business may be preserved, each transaction has to be recorded in the books of original entry (called journals and ledgers). Additionally each transaction needs to be classified in accordance to pre- determined plan of classification. The recording of all the financial transactions is known as book-keeping and it is necessary preliminary to the other functions of presenting and interpreting.

Presenting deals with the summarization of the recorded data in the form of reports or statements which may be put to internal or external use by the interested parties. The reports or the statements such as Profit and Loss Account and the Balance Sheet are the results of utilization of recorded transactions and their further processing to draw financial picture to meet the needs of all parties concerned .

Interpretation deals with explanation and utilization of the reports or statements. How the profits of the company have increased / decreased in comparison to the previous year and what are the contributing factors to that falls under its preview. Similarly an exposure to Balance Sheet items shall reflect the financial strength of the enterprise and how best it can be utilized for drawing inferences. The accounting report needs to be explained to those who are likely to use the information. This can be accomplished by explaining the meaning, uses and limitation of reported data with the help of the ratios, percentages etc.

We have already said that accounting records transactions and events of financial nature according to Generally Accepted Accounting Principles. These principles are now discussed below.