What Do You Mean By Accounting?

The word Accounting means counting. It is related with the counting of monetary transactions (Quantifiable transactions in which money is involved in an event and which can be measured in terms of money) only. So, it deals with those events which are converted into monetary transactions or can be expressed or measured in terms of money. For example, goods bought for $1,000 is a monetary transaction, so it is counted and recorded in the books of accounts but "The company will launch new product into the market" is not a monetary transaction as there is no involvement of any money. Now, we are in a position to explain what is accounting in today world companies.

Every organization, whether profit or non profit, requires proper recording of economic transactions in a classified and summarized way so that these are assessed by users of accounting information (owners, management, investors, government, law authority, etc.) in making economic decisions. The accounting does that work for these kinds of organizations. For example, a sole proprietor needs to know about revenues and expenses for the period to find profit during the period which shows financial performance for the period (Let's say one year).

Accounting involves proper recording of Books of Accounts called Bookkeeping in which transactions are recorded in Journals and Ledgers. From books of accounts, all other Financial Statements are prepared. These financial statements include Income Statement, Balance Sheet, Statement of Retained Earnings and Statement of Cash Flows.

Phases Of Accounting

There are two phases of Accounting which are discussed below:

1. Bookkeeping

In this phase daily transactions are recorded in journal and ledgers. For example merchandise sold, merchandise purchased, cash received from customers, etc.

2. Summarizing And Interpreting

In this phase, accounting data collected from Bookkeeping are summarized and interpreted with the help of Trial Balance, Income Statement, Balance Sheet, Statement of Retained Earnings and Cash Flows. For example, trial balance shows arithmetic accuracy and equality of total debit accounts' balances and total credit balances, Income Statement shows financial performance of the business, Balance Sheet shows financial position of assets, liabilities and equity, Statement of Retained Earnings shows earnings retained in the business after paying dividends to shareholders and Cash Flows Statement shows cash outflows and inflows for operating, investing and financing activities of the business.

Test Your Knowledge

The accounting process involves in recording:

 A) Quantifiable economic event B) Non quantifiable economic event C) All of them D) None of them

The correct option of this Multiple Choice Question (MCQ) is A as in accounting only quantifiable economic events are recorded in the books of accounts which can be expressed on the monetary basis i.e., involving money and can expressed in terms of money in the events.