An Introduction to Accounting: Understanding Its Meaning and Functions

Accounting: The Language of Business

People usually say that accounting is the language of business. The main goal of businesses is to make money so owners have to check their finances all the time. Every day, every month or every year. It is really important to know things like how money you are making or losing how much stuff you have in stock what you have to pay and who has to pay you money. This information helps you make decisions. To get all this information you have to write down everything that happens with your business all year round. Accounting is very important, for this. I think people often believe that accounting is difficult and boring. However, this is not entirely true. Accounting is actually pretty interesting and useful because it helps us understand how money is earned, managed and used in any business. Accounting gives us information to plan our money and make our business grow. Whether a business is small or large accounting is essential because there are financial transactions that happen every day. Accounting helps us keep track of these transactions, which would be very hard to do without it. Back in the day, accounting was all done by hand, with records kept in books. But tech has changed things a lot. Now, most accounting is done on computers with special programs like Tally. This software helps businesses keep correct records, save time, and handle money well. Nowadays, it’s nearly impossible to run a business well without good accounting. So, accounting is a necessary job in the world today.

What is Accounting?

Today’s era is the age of business. Trade and commerce are growing rapidly and becoming more complex day by day. In such an environment, learning accounting has become extremely important. For any business or organization, it is not possible to remember all financial transactions for a long period such as how much has been purchased, how much has been sold, and whether the business is earning a profit or suffering a loss.

To overcome this difficulty, businesses maintain written records of all financial transactions. These records serve as written evidence and provide complete information about the operations and activities carried out by the business.

Meaning of Accounting

Accounting is the process of recording financial aspects of a business in a systematic manner. It involves maintaining written records of all transactions related to the exchange of money within an organization or business.

In every business whether a large organization or a small shop there are regular sales and purchases. Remembering all these transactions is not practical. Therefore, when these transactions are recorded in a diary, register, or computer system, the process is known as accounting.

Benefits of Accounting

Accounting provides several important benefits, such as:

1. Knowing how much money is to be received and paid
2. Determining profit or loss
3. Understanding about amount of capital invested
4. It Helps on planning and decision-making
5. It’s Provides a clear financial picture of the business

Definitions of Accounting

According to R. N. Anthony: “Nearly every business enterprise has an accounting system. It is a means of collecting, summarizing, analyzing, and reporting, in monetary terms, information about business.”

In simple words, accounting involves recording every business transaction systematically on a daily and date-wise basis. These records help in determining whether the business is running at a profit or a loss and are useful for preparing final accounts.

1. Identifying - The first function of accounting is to identify financial transactions and events from source documents such as invoices, cash memos, and agreements. Record only those transactions that can be measured in monetary terms. For example, the purchase of goods for cash or on credit is recorded, whereas non-financial events such as changes in managerial policies or employee appointments are not recorded.
2. Recording - Once transactions are identified, the next step is to record them systematically and chronologically. In other words, recording in journal only those transactions are recorded in accounting which are of a financial character. Every transaction is first entered in a journal or subsidiary book to ensure that all financial activities are properly documented and traceable. In simple words, its basic function to record in orderly manner which is written in journals or subsidiary books such as cash journals, credit purchase journals, credit sales etc. 
3. Classifying - The recorded transactions are then classified to group similar types of transactions together in one place, usually in ledger accounts. In simple words classification is the process of grouping the transactions of one nature at one place in a separate account. That’s why its function is also known as posting to the ledger, this helps in organizing financial data. To ensure the mathematical accuracy of these accounts, a trial balance is prepared. In simple words, it is systematic analysis of recorded data which is grouping of transactions and entries, ledger preparation individual accounts and heads. 
4. Summarising - Summarising is the art of presenting the classified data in such a manner which is understandable and useful to management and other users of such data. The classified data is summarised to produce financial statements such as the Trial Balance, Profit and Loss Account and the Balance Sheet. These summaries provide a clear picture of the business’s financial performance and position, making the information useful to various stakeholders. In simple words, it presenting the classified information which is useful to the stakeholders – trial balance, income statement, balance sheet 
5. Analysing - Analysis involves studying the relationship between various items in the Profit and Loss Account and the Balance Sheet. The main purpose is to assess the financial strengths and weaknesses of the business. Analysis forms the foundation for proper interpretation and decision-making.
6. Interpreting - Interpretation explains the significance and implications of the analysed financial data. It helps users understand what the figures actually mean and assists in making informed decisions about the business’s operations and future strategies.
7. Communicating - This final function of accounting is to communicate the summarized, analysed, and interpreted information to interested parties such as owners, investors, creditors, and management. It involves Preparation and distribution of accounting reports such as income statement, balance sheet, crucial ratios, new initiatives, innovations, market trends etc. Effective communication ensures that all stakeholders are well-informed about the financial status and performance of the business. 

Objective of Accounting

1. Maintain complete and systematic records - The transactions that are taking place are systematically recorded and then posted to the ledger and after ledgering, financial statements are prepared and in the financial statements, profit and loss account and balance sheet are created so that we can get information about the financial position of the business.
2. Communicating the financial result to various parties - Accounting's another role is to communicate financial results to various parties, including both internal and external parties. In this, we share financial information, which helps them make better decisions, such as information about assets or liabilities. It helps internal business people communicate how much profit or loss the business is making.
3. Protecting the assets of the business - It means that the assets whether it is cash in hand or cash at bank or inventory or stock, debtor, all these are our assets. The goods or services provided on credit to the debtor are due and money is due from them, they are protected by maintaining them properly.
4. Providing assistance to management -  Accounting is to help management through accounting so that they can make good decisions or control things.
5. Compliance of legal needs - Whatever accounts we have maintained, we can also use them legally. There are different provisions or laws like company act, income tax act, goods and service tax act, a businessman can submit his different statements like annual account and GST return etc. If required, the balance sheet and profit and loss account can also be submitted or seen in the court.
6. Fixing responsibility - In this, we fix different employees by giving them different responsibilities. We divide their work by creating separate departments like purchase department, sales department. By creating separate departments in this way, their heads become responsible for them. In this way, those workers or employees do their work well because there is pressure from their heads on them. This work is done well and the business also works smoothly. Its result is also seen in the output of the company.

Branches of Accounting

1. Financial Accounting – Is the branch of accounting which records financial transactions and events, summarizes and interprets them before communicating the results to the users.
2. Cost 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.

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.
Bookkeeping is a Routine Job	Accounting is a 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.

Various Users of Accounting Information

Accounting information is mainly used by two types of users— internal and external users of the organization.

1. Internal Users - These peoples are worked inside the business so they denoted as an internal user and they use the accounting information to make decisions.
• Owners: They contribute capital to the business so they use accounting information such as accounting reports to know how much profit the business is earning and to check its financial position.
• Managers: They use accounting information to plan, control, and make decisions for the smooth functioning of the business. Accounting information helps management to determining selling price, cost, investment.
• Employees: Employees interested in the company’s financial performance because it can affect their job security, salaries, and bonuses which is linked to profit deposit EPF and ESI.
2. External Users - These peoples or organizations are outsider for the business who also need accounting information.
• Banks and Investors: Banks and investors use business financial statements to decide whether to lend money or invest in the business. In simple terms accounting information helps to bank safety and recovery of loan provided and investor do not have direct control, risk of investment.
• Consumers: Customers may look at financial information to check the stability and reliability of a company before dealing with it also reduced cost of product, cost control.
• Creditors: Suppliers and other creditors they use accounting data to know if the business can pay its debts on time in simple terms they use accounting information for creditworthiness of business.
• Government: The government uses accounting information to determine taxes and the data also help to make economic and regulatory policies. In simple terms, it helps government to make policy decisions and assess correct taxes. 
• Public: The general public may be interested in the company’s substantial contribution of business to economy, employment, and community development.

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. 

Frequently Asked Questions (FAQs) on accounting

1.What are accounting transactions?

Accounting transactions are events involving and measure in terms of money that affect the financial position of a business, such as sales, purchases, payments, and receipts.

2.What is the role of accounting in decision-making?

Accounting provides accurate financial data which helps to management take decisions related to investment, expansion, cost control, and pricing.

3. Is accounting necessary for small businesses?

Yes, accounting is also essential for small businesses to track transactions, cost control, profit calculation, and comply with legal and tax requirements.

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