Accounting Definition (Real meaning of Accounting)


Accounting Definition

Accounting is broader than Bookkeeping. It is said that accounting begins when bookkeeping ends.

Bookkeeping is part of accounting.

Accounting is the process of recording, classifying, summarizing, analyzing, interpretation the financial transaction and communicating the results of business operations to the various users.

It also ascertains profit or loss.

Accounting is also called the “language of business”.

Accounting is very useful for every big or small business and any kind of organizations.

Objectives of Accounting.

1) To maintain records

It is one of the major objectives of accounting.

Since human memory is limited, it is very difficult or a problem for a person to remember all the financial transactions that a business performs.

So, the accounting maintains permanent records of all financial transactions of a business in books and computers based on a set of rules.

2) To ascertain profit or loss

The main aim of every person is to earn more and more profit from the business.

So, accounting ascertains whether the business has earned a profit or suffered a loss by preparing profit and loss account at the end of the period.

3) To show the financial position of a business

Every business or organisation want to know his profit or loss or financial position at the end of the year.

Therefore, accounting shows the financial position of the business by preparing a statement called a balance sheet.

The balance sheet is a statement of capital, liabilities and assets of the business or organization.

4) To provide financial information

Financial information is essential to its users for making financial decisions.

Therefore, accounting provides the information of operating results and financial position of the business to different users for their decisions making purposes.

5) To facilitate management

Accounting facilitates management.

The management often requires financial information for decision making, effective control, budgeting and forecasting.

6 ) To determine the tax amount

Every business or organization has to pay taxes of different kinds to government.

Therefore, it provides financial information to the tax office, which helps in determining the amount of tax liability.