"Proper accounting is like engineering. You need a margin of safety. Thank God we don't design bridges and airplanes the way we do accounting."
Accounting was defined by the American Institute of Certified Public Accountants (AICPA) in 1941 as ‘the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events that are, at least in part, of financial character, and interpreting the results thereof'. Accounting's scope widened as economic growth resulted in a shift in its function. Accounting was defined by the American Accounting Association (AAA) in 1966 as "the process of finding, measuring, and conveying economic information to allow informed judgements and choices by consumers of information."
Accounting is therefore described as the act of recognizing, measuring, documenting, and disseminating to interested consumers of information the necessary information related to an organization's economic events. We must grasp the following essential elements of the definition in order to appreciate the precise nature of accounting:
Economic Events
Identification, Measurement, Recording, and Communication
Interested Users of Information
Organization
Economic Events
Economic events are a part of business organisations. An economic event is defined as a monetary event that has a significant impact on a business organisation and comprises transactions. For instance, purchasing equipment, installing it, and maintaining it ready for production is an event that includes a variety of financial transactions such as purchasing a machine, transporting it, preparing the site for installation, spending on installation, and trial runs. Accounting therefore identifies a group of transactions related to a certain economic occurrence. External events are those that involve transactions between a third party and an organisation. Here are some instances of these types of transactions:
Sale of merchandise to the customers.
Rendering services to the customers by ABC Limited.
Purchase of materials from suppliers.
Payment of monthly rent to the landlord.
Identification, Measurement, Recording and Communication
Identification: It entails deciding which transactions to record, i.e. identifying the events that must be documented. It entails monitoring activities and choosing those that have a financial component and are related to the organisation. As a result, company transactions and other economic events are assessed to determine if they need to be documented in accounting books. The value of human resources, changes in management practises, and personnel appointments, for example, are all significant, yet none of them are reflected in accounting records. When a business makes a cash or credit sale or pays a wage, the transaction is documented in the books of account.
Measurement: It refers to the conversion of financial words (including estimations) of commercial transactions into monetary units, such as rupees and paise. An event is not regarded for recording in financial accounting if it cannot be quantified in monetary terms. As a result, significant events such as the hiring of a new managing director, contract signings, or staff changes are not recorded in the books of accounts.
Recording: Once the economic events have been recognised and quantified in financial terms, they are documented in monetary terms and in chronological sequence in accounting records. The recording is done in such a way that the relevant financial information is summarised according to standard procedure and made accessible as needed.
Communication: Economic events are recognised, monitored, and documented so that relevant data may be produced and disseminated to management and other internal and external users in a specific manner. Accounting reports are used to convey the information on a regular basis. These reports offer information to a range of users who are interested in evaluating an enterprise's financial performance and position, planning and managing company operations, and making required choices on a regular basis. The accounting information system should be structured such that the appropriate information is delivered to the appropriate person at the appropriate time. Depending on the requirements of the users, reports may be generated daily, weekly, monthly, or quarterly. The accountant's skill and efficiency in providing pertinent information is a critical component of the communication process.
Organisation
A commercial enterprise, whether for profit or not, is referred to as an organisation. It may be a single proprietorship, partnership firm, cooperative society, company, local authority, municipal corporation, or any other association of people, depending on the amount of operations and degree of commercial activity.
Accounting, often known as the language of business, is a method of communicating essential financial information about a company organisation. Many users need financial data in order to make critical choices. Internal users and external users are the two main types of these users. Chief Executive, Financial Officer, Vice President, Business Unit Managers, Plant Managers, Store Managers, Line Supervisors, and others are among the internal users. Investors (shareholders), Creditors (Banks and other Financial Institutions, Debenture holders and other Lenders), Tax Authorities, Regulatory Agencies (Department of Company Affairs, Registrar of Companies, Securities Exchange Board of India, Labour Unions, Trade Associations, Stock Exchange, and Customers, among others) are some of the external users. Accounting is a means to an end, with the goal being the choice that is aided by the availability of accounting information, since its main purpose is to offer relevant information for decision-making.