Accounting Concepts
Meaning, Definitions and Objectives of Accounting
Meaning of Accounting
Accounting is often called the language of business. It is one of the means of communicating information regarding the affairs of business. As a language of business accounting conveys various information regarding business activities. it communicates the result of business operations to various parties who have some stake in the business, viz. the proprietor, creditors, investors, government and other agencies.
Accounting is said to be as old as the money itself. Accounting’s infancy dates back to earliest days of human agriculture and civilization when the need to maintain accurate records of quantities and relative values of agricultural products first arose. The present form of accounting passed through various stages of evolution. It has developed to meet the emerging needs and requirements of growing society. Like any other discipline it has developed by adapting to changing environment. With the changing forms of business organization starting from sole proprietorship, partnership, co-operative to company form of organization, the accounting has also brought about gradual change in its concepts, techniques, rules, procedures, methods of recording and presentation to suit social requirements.
Important Definitions
Here are some important definitions of accounting by various authors and organizations:
1. American Institute of Certified Public Accountants (AICPA):
“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.”
2. American Accounting Association (AAA):
“Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.”
3. A. W. Johnson:
“Accounting may be defined as the collection, compilation, and systematic recording of business transactions in terms of money, the preparation of financial reports, and the interpretation of these reports for decision-making purposes.”
4. R. N. Anthony:
“Accounting is a means of collecting, summarizing, analyzing, and reporting in monetary terms information about the business transactions or events of an organization.”
5. John N. Myer:
“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.”
6. Smith and Ashburne:
“Accounting is the science of recording and classifying business transactions and events, primarily of a financial character, and the art of making significant summaries, analyses, and interpretations of those transactions and events and communicating the results to persons who must make decisions or form judgments.”
7. Charles T. Horngren:
“Accounting is a system that provides quantitative information about finances.”
8. Kohler:
“Accounting is the process of recording, summarizing, analyzing, and interpreting financial (money-related) activities to permit individuals and organizations to make informed judgments and decisions.”
These definitions emphasize various aspects of accounting, such as the recording of financial transactions, the classification and summarization of financial data, the preparation of financial reports, and the interpretation and communication of financial information for decision-making purposes.
Objectives of Accounting
The main objectives of accounting are:
1. To maintain records
Written records are always better than oral records since written records can be used by different persons for different decision-making purposes and serve as evidence of transactions. Nowadays, the volume of transactions is so large, a human memory cannot absorb each and every transaction. Accounting is done to keep a systematic record of
i. Financial transactions
ii. Assets and
iii. Liabilities
2. To ascertain whether the business operations have been profitable or not
Accounting helps to know whether a business has earned profit or suffered loss during the accounting period. It gives us an idea of efficiency of the business. Frist of all revenue is determined and then expenses incurred for earning the revenue are matched with the revenue for calculating the difference known as net profit or net loss.
3. To ascertain the financial position of the business
Balance sheet or Position Statement is prepared to give an idea of the financial position of the business on a particular date. The financial position of an enterprise is indicated by its assets on a given date and its liabilities on that date. Excess of assets over liabilities represent the capital and it indicative of the financial soundness of an enterprise.
4. To generate information
Accounting records generate such information which may be helpful to various persons in planning, control , evaluation of performance and decision-making.
