Understanding Accounting: Meaning, Characteristics, functions, Objectives

Accounting Meaning 

Accounting is the language of Business. Accounting is the medium of communication. It helps the business not only in finding out profits and losses for a period and its financial position on a particular date but also helps in management of business.

Accounting is a systematic process of identifying, measuring, recording, classifying, summarizing, interpreting and communicating financial information.

1. “Accounting is the art of recording, classifying and summarising 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 result thereof.” — American Institute of Certified Public Accountants
2. “It is the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.” American Accounting Association

Characteristic of Accounting

1. Identification of financial transactions and events - Accounting records only those transactions events which can be measured in term of money. For example, salary paid, raw material purchased, honesty or caliber of employee such transaction is identified with the help of bills and receipts as evidence of the transactions.
2. Measuring the identified transactions – Identifying the business transactions of a financial character from the source documents such as invoice, agreements, cash memos etc.  In terms of a common measurement unit i.e., currency of a country. Financial transaction in terms of money
3. Recording – Accounting is to keep a systematic record of all business transactions, which are identified in chronological order of their occurrence in the journal or subsidiary books. Recording is the process of entering business transaction financial character in journal book of original entry. For example – Journal, Cashbook, Sales Book, Purchase Book etc.
4. Classifying – It is the process of grouping transactions of the similar type at one place. Transaction of journal are classified and posted to the main book of a ledger. In order to verify the arithmetical accuracy of the accounts, trial balance is prepared. For example – Mohan a/c is the ledger, all the transaction related to Mohan are posted so that what is ultimately due to Mohan or due from Mohan can be ascertained.
5. Summarising – Means presenting the classified data in a manner which is understandable and useful for users internal as well as external of accounting statements. We prepared following statements such as Trial Balance, Trading A/c, Profit & loss A/c and Balance Sheet.
• The classified information available from the trial balance is used to prepare profit and loss account and balance sheet in a manner useful to the users of accounting information. Trading and Profit & Loss A/c, Balance Sheet collectively known as Final Accounts.
6. Analysis and Interpretation - It establishes the relationship between the items of the profit and loss account and the balance sheet. In this step the user of financial data can make a meaningful judgement of the profitability and financial position of the business. It helps in planning for future in a better way.   The purpose of analysing is to identify the financial strength and weakness of the business. It provides the basis for interpretation. Interpretation should be useful to the users, so as to enable them to take correct decisions.
7. Communication –  The results obtained from the summarised, analysed and interpreted information are communicated to the interested parties. Communication means communicating the financial data i.e., financial statement to its users, so that the right decision can be taken at right time.

Branches of Accounting

1. Financial Accounting – Is the branch of accounting which records financial transactions and events, summarises and interprets them before communicating the results to the users like, Preparation of financial statements.
2. Costing Accounting – Is the branch of accounting concerning with ascertaining cost of products, operations, processes or activity with an objective of reducing and controlling cost. 
3. Management accounting - Is the branch of accounting concern with generating information which helps the management in decision making.

Objectives of Accounting

1. Maintaining accounting records in systematic manner - All the transactions should be recorded in chronological order in Journal and then posted to principal book i.e., Ledger.
2. Determining profit and loss (Trading and P &L a/c is prepared) - To check whether the business has earned profits or incurred losses, we prepare a “Profit &Loss Account”, business men will get to know about the results of operations periodically.
3. Determining financial position (Balance sheet is prepared) - To determine the financial position of the business, for this purpose, we prepare a “Balance Sheet”.
4. Facilitating Management (In Decision making) - Providing information to the various interested parties or stakeholders will help in making good financial decisions
5. Providing accounting information to users (internal & external user) - By analyzing financial data and providing interpretations in the form of reports, accounting assists management in handling business operations effectively.
6. Protecting business assets - Record of assets is maintained in separate book known assets register.

Functions of Accounting

1. Maintaining systematic accounting records
2. Preparation of financial statement
3. Assistance to management
4. Communicating the financial information
5. Meeting the legal requirement

The law such as company act, income tax act requires submissions of return in the from and period as is prescribed in the law. The return can be summitted if the accounting records are maintained systematically and timely. 

Difference between Bookkeeping vs. Accounting

Bookkeeping	Accounting
It is concerned with identifying financial transaction, measuring them in money terms, recording them and classifying them	In accounting we also do summarizing the recorded transactions, interpreting them and communicating the results.
Objective – to maintain systematic records of financial transactions.	Objective – To ascertain net results of operation & financial position and communicate information to interested parties
Bookkeeping is the first step to accounting.	Accounting begins where bookkeeping ends.
Routine Job	Analytical & Dynamic Job
Not required special skill	It requires special skill and ability
Vouchers and other supporting documents are necessary as evidence to record the business transactions.	Bookkeeping works as the basis for accounting information.
It is enough to have elementary knowledge of accounting to do bookkeeping.	For accounting, advanced and in depth knowledge and understanding is required.

Limitations of accounting

1. Accounting is not fully exact – some estimates are made for ascertaining profit or loss for example – estimating the useful life of asset etc.
2. Accounting ignores the qualitative elements – honest employee, quality of management etc.
3. Accounting ignores the effect of price level changes – it presumes that value of money remains stable, statements are prepared historical cost.
4. Accounting may lead to window dressing – manipulation of a/c can conceal vital facts and present financial statement to show a better position than actual. 

Users of Accounting information

Internal Users 

1. Owners contribute capital and took maximum risk
2. Management took important decision for example selling price, cost control, investment etc.
3. Employee and worker – Entitled to bonus which is linked to profit of company.

External Users

1. Banks and finance institution provided loan, so watch the performance, recovery of loan
2. Investor and potential investors how safe are investment
3. Creditor to assess the creditworthiness of business
4. Government and its authorities to assess the correct tax dues after an analysis of the financial statement.
5. Public business contributes to economy Part of society

FAQ's

What is Double-Entry Accounting?

Double-entry accounting is a system where every transaction affects at least two accounts – one debit and one credit – ensuring the accounting equation stays balanced: Assets = Liabilities + Owner's Equity

What is a Ledger?

A ledger is a book or digital record where all journal entries are posted into individual accounts (like cash, sales, expenses), classified under headings like Assets, Liabilities, etc.

What is Trial Balance?

A trial balance is a statement listing all ledger account balances at a particular date, used to check the mathematical accuracy of bookkeeping (i.e., total debits = total credits).

What are Assets and Liabilities in Accounting?

A trial balance is a statement listing all ledger account balances at a particular date, used to check the mathematical accuracy of bookkeeping (i.e., total debits = total credits).

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