In this tutorial, we will learn about accountancy is the practice of recording, classifying, and reporting on business transactions for a business.
Every individual performs some economic activity for survival. A salaried person gets his salary, daily-waged labor gets his wages, and a businessman gets profit as his remuneration or reward for their hard work. The compensation earned by them is used to buy daily necessities such as food, clothing, residence, education, etc. Not necessarily the economic activities are done for individual benefit; they are also performed for social benefits, i.e., the benefit of the public. All financial activities are done through transactions & events.
To explain the concept better, let us take an example. Ram invests 1, 00,000 (INR), and goods worth of 100,000(INR) in a stationary business. On 1st January 2016, he purchased goods of 50,000 (INR), and during the month, he made a sale of 1, 50,000(INR). They pay the shop rent, electricity bills, and salaries to support staff cumulatively 15,000(INR). He finds out that stock worth 50,000(INR) is still left at the inventory.
During the year, the Ram carried out few transactions such as investment in the business, purchase of goods, etc. and encountered some events such as Opening stock, Closing stock, and Surplus, i.e., Profit.
Goods sold + Goods in hand – Goods purchased – Shop rent paid – Electricity bill – Salaries = Surplus
150000+ 50000 – 50000 -50000 -15000= 85000
85000(INR), which is the surplus, is the result of the transactions made in the year.
So, every business, even individuals, record all their transactions to have adequate information about the economic activity as an aid to decision making. Accounting has developed to serve this purpose, which helps to create useful information that makes the business transparent and helps make an effective decision-making process.
An accounting has universal application for recording transactions and presenting suitable information to aid decision making regarding any economic activity ranging from family functions to national government. But here in after we should talk about business activities. Nevertheless, it will give adequate knowledge to think coherently of accounting as a field of study for universal application.
Accounting is closely related to the development of the business world. Thus, to understand accounting as a field of study for universal application. Accounting aims to meet the information needs of the rational and sound decision-makers and, therefore, the language of business.
Meaning of Accounting.
The Committee on Terminology set up by the American Institute of Certified Public Accountants formulated the following definition of accounting in 1961:
“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are part, in part of at least, of a financial character and interpreting the result thereof.”
As per definition, we can say that.
- Accounting is an art—only a technique of record keeping. The process of accounting starts by identifying and classifying events and transactions and then recording in the necessary books of accounts.
- Every sound accounting system includes summarization ready for reference. Primarily, the transactions recorded in Journal then they are transferred to Ledger.
- The deals must be classified in monetary terms, i.e., and they’re to be measured in the nations ruling currency, e.g., Rupee in India, Dollar in the U.S.A, Pound Sterling in the U.K.
- Finally, accounting used for interpreting the results for determining the financial position of the organization or for the estimation of the profit earned or loss suffered.
However, the above definition does not reflect the present-day accounting function. Nowadays, the concept of accounting is way broader than that is described in the high definition.
According to the above definition, the role of accounting ends after interpreting the result of the financial transactions but in the present world with the diversification of management and ownership has increased the workspace or say the scope of accounting in the following ways:
- The importance of communicating the results has become very necessary and even mandatory in some cases.
- Globalization of economy.
- Expansion of the society and the industries.
The definition is given by the American Accounting Association (AAA) in 1966 which states
The process of identifying, measuring, and communicating economic information will permit informed judgments and decisions by the accounts. In summarizing, analyzing, and interpreting the financial transactions and delivering the information’s results.