1. Meaning of Accounting

CHAPTER 1

INTRODUCTION TO ACCOUNTING

MEANING OF ACCOUNTING

AMERICAN INSTITUTE OF CERTIFIED PUBLIC

ACCOUNTANTS

“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.”

Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. The financial statements used in accounting are a concise summary of financial transactions over an accounting period, summarizing a company's operations, financial position, and cash flows.

NEED FOR ACCOUNTING

•  In all activities and organizations (business or non-business) which require money and

other economic resources, accounting is required to account for these resources.

•  In other words, wherever money is involved, accounting is required to account for it.

•  Accounting is often called the language of business. The basic function of any language is

to serve as a means of communication. Accounting also serves this function.

Qualitative Characteristics of Accounting Information 

Reliability  

Reliability means the users must be able to depend on the information. The reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured and displayed. A reliable information should be free from error and bias and faithfully represents what it is meant to represent. 

Relevance  

To be relevant, information must be available in time, must help in prediction and feedback, and must influence the decisions of users by : (a) helping them form prediction about the outcomes of past, present or future events; and/or (b) confirming or correcting their past evaluations. 

Understandability  

Understandability means decision-makers must interpret accounting information in the same sense as it is prepared and conveyed to them. The qualities that distinguish between good and bad communication in a message are fundamental to the understandability of the message. A message is said to be effectively communicated when it is interpreted by the receiver of the message in the same sense in which the sender has sent. Accountants should present the comparable information in the most intenlligible manner without sacrificing relevance and reliability. 

Comparability  

It is not sufficient that the financial information is relevant and reliable at a particular time, in a particular circumstance or for a particular reporting entity. But it is equally important that the users of the general-purpose financial reports are able to compare various aspects of an entity over different time period and with other entities. To be comparable, accounting reports must belong to a common period and use common unit of measurement and format of reporting. 

Meaning of Accounting:

“Accounting may be defined as the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the results to the persons interested in this information”

Only Events related to Business which can be expressed in terms of Money are Economic Transactions and Economic Events.

Chapter 1:

Introduction to Accounting

MEANING OF ACCOUNTING

“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.”

Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. The financial statements used in accounting are a concise summary of financial transactions over an accounting period, summarizing a company's operations, financial position, and cash flows.

NEED FOR ACCOUNTING

• In all activities and organizations (business or non-business) which require money and other economic resources, accounting is required to account for these resources.

• In other words, wherever money is involved, accounting is required to account for it.

• Accounting is often called the language of business. The basic function of any language is to serve as a means of communication. Accounting also serves this function.