What is Accounting?

Most of the readers and visitors of this blog are business owners and entrepreneurs. Thus, we decided to publish series of articles that will help them understand the field of accountancy, which includes accounting, bookkeeping and auditing. But since this field is broad, we will start from the basics. We will start on understanding what is considered the language of business – accounting. So what is accounting?

Definition of accounting

There are many definitions of accounting that have been issued by different organizations and publications. The following are some of those definitions:

“Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.” – American Institute of Certified Public Accountants (AICPA)

“Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.” – American Accounting Association (AAA)

“Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decision.” – Accounting Standards Council (ASC), succeeded by Financial Reporting Standards Council (FRSC).

Accounting process

From the definitions above, we can have the following processes and phases of accounting:

1. Identifying – this is the process of recognition or nonrecognition of business activities as accountable events.

2. Measuring – this is the process of assigning amounts or value to the accountable economic transactions and events.

3. Communicating – this is the process of preparing and distributing accounting reports to potential users of accounting information. This process includes the following phases:

a. Recording – also called journalizing, involves the routine and mechanical process of committing to writing business transactions and events on the books of accounts in a chronological sequence in accordance with established accounting rules and procedures.

b. Classifying – this involves sorting or grouping of similar and interrelated transactions and events into their respective classes. This is performed by posting accounts to ledger.

c. Summarizing – this involves the preparation of financial statements, which includes the balance sheet (statement of financial position), income statement, statement of equity, statement of cash flows and accompanying notes to the financial statements.

d. Interpretation – this involves analyzing the liquidity, solvency, stability and profitability of an entity.

Purpose of accounting

The purpose of accounting is to provide financial information to statement users so that they could make informed judgment and better decision.

Users of financial information

Accounting aims to supply financial information to the following users to assist them in making better decisions.

1. Owners and management (proprietor, partners, stockholders and officers).
2. Investors
3. Employees and labor unions
4. Lenders or creditors
5. Suppliers
6. Customers
7. Government agencies (BIR, SEC, LGU, PSE and other regulatory agencies)
8. The public

Accounting profession

The accountancy profession is practiced by accountants. In the Philippines, qualified accountants have degree in Bachelors of Science in Accountancy. A Certified Public Accountant (CPA) is a professional who has passed the Certified Public Accountant Licensure Examination required by the Professional Regulation Commission through the Board of Accountancy. CPAs can practice their profession in public accounting, private accounting and government accounting.

Please stay tuned for our next accounting articles.