What Do You Mean By Accounting?

The word Accounting only means counting is incorrect, but, in fact, Accounting is the systematic process of identifying, recording, classifying, summarizing, analyzing, and interpreting the financial transactions and events of a business or organization.

The word Accounting is often associated with counting, but in modern business practice, accounting is much more than simply counting money. It provides a structured way to convert relevant economic activities into useful financial information that can help business owners, managers, investors, lenders, government authorities, and other users make informed economic decisions.

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). By preparing Income Statement and Balance Sheet, he better knows about net income for the period and the financial position of assets, liabilities and equity of the business.

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.

Accounting Is More Than Profit Calculation

A beginner may think that the main purpose of accounting is to calculate profit.

Profit is certainly important, but accounting provides much more information.

Accounting helps users understand:

• Financial performance
• Financial position
• Cash flows
• Assets
• Liabilities
• Equity
• Revenue
• Expenses
• Receivables
• Payables
• Changes in owners' equity
• Financial trends and relationships

For example, two businesses may report the same profit but have very different financial positions. One may have substantial cash and low debt, while another may have limited cash and significant liabilities.

Therefore, profit alone does not provide a complete picture of financial health.

Personal Practical Example

When I visited Decent Medical Store to purchase medicine, I observed a simple example of how accounting is applied in a real business environment.

The staff used accounting software to identify the required medicine, enter the quantity, and calculate the applicable price. The software helped determine the total amount payable based on the quantity of medicine purchased and the relevant selling price.

After completing the transaction, the cashier provided a sales invoice showing important details such as the quantity sold and the total amount payable by the customer.

From an accounting perspective, this everyday purchase represents a practical example of a sales transaction. The transaction creates a financial record that can later contribute to the store's sales, revenue, inventory, cash, and receivable records, depending on how the customer paid.

The same basic process can be found in many other medical stores and retail businesses, including Fazal Din's, Publix, and similar establishments. Modern accounting software makes these transactions faster and more organized by helping businesses record sales, update inventory information, calculate amounts, and maintain transaction records.

This example shows that accounting is not limited to preparing financial statements at the end of an accounting period. Accounting is also part of everyday business transactions, from purchasing medicine at a medical store to recording sales and maintaining financial records.

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.

Uses of Computerized Accounting System

A computerized accounting system uses accounting software to record, process, store, and report financial information electronically. It can make routine accounting work faster, more organized, and less dependent on manual calculations.

The usefulness of a computerized accounting system can be seen in several important areas:

1. Improves Accuracy

Accounting software can automatically perform calculations such as totals, subtotals, taxes, discounts, and account balances. This reduces the risk of arithmetic mistakes that may occur when calculations are performed manually.

However, software does not guarantee perfect accounting. Incorrect transaction entries, wrong account classifications, or incorrect information entered by users can still produce incorrect results. Therefore, accuracy depends on both reliable software and proper accounting practices.

2. Saves Time

A computerized system can process large numbers of transactions much more quickly than a purely manual system. For example, once a sale is entered, the software may automatically calculate the amount, update relevant records, and preserve the transaction details.

This allows accountants and business staff to spend less time performing repetitive calculations and more time reviewing financial information.

3. Supports Reliable Recordkeeping

Accounting software can maintain organized records of sales, purchases, expenses, cash transactions, receivables, payables, and other financial activities.

Well-maintained electronic records also make it easier to search for a particular transaction, review previous entries, and prepare financial reports.

4. Helps Improve Transparency

A computerized accounting system can provide a clearer record of financial transactions. Depending on the software, businesses may also be able to maintain transaction histories, user activity records, supporting documents, and audit trails.

These features can help management review who entered or changed information and when, although the level of transparency depends on the software configuration and the organization's internal controls.

5. Makes Financial Reporting Easier

Accounting software can use recorded transactions to generate useful reports such as sales reports, expense reports, trial balances, income statements, balance sheets, and cash-flow information.

Instead of manually compiling every figure from separate records, users can obtain reports from the underlying accounting data.

Practical Accounting Thinking

Consider a retail store that records hundreds of sales every day. In a manual system, employees may need to calculate each invoice, update sales records, maintain inventory records, and prepare summaries separately.

With a computerized accounting system, much of this work can be connected. When a sale is entered, the software may calculate the invoice amount and update relevant records automatically.

This demonstrates why accounting software is valuable in modern organizations: it connects routine transaction recording with financial information and reporting.

At the same time, computerized accounting should not be viewed as a replacement for accounting knowledge. A computer can process information quickly, but it cannot automatically determine whether an incorrectly entered transaction represents the correct economic reality. Proper account classification, authorization, reconciliation, review, backups, and internal controls remain essential.

Conclusion

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

It begins with relevant economic transactions and events and ultimately produces information that helps users understand an organization's financial performance, financial position, and cash flows.

Bookkeeping is an important part of the process because accurate accounting depends on properly maintained accounting records. However, accounting goes beyond bookkeeping by summarizing and interpreting financial information and communicating it through financial statements and other useful reports.

The most important concept for beginners to remember is this:

Accounting is not merely the counting of money. It is a structured system for turning financial data into useful information for economic decision-making.

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.