The American Institute of Certified Public Accountants (AICPA) defines accounting as the art of efficiently and effectively recording, classifying, and summarizing transactions and events in monetary terms, as well as interpreting the results.
- The main aim of accounting is to ascertain the profit or loss and determine the financial position of an organization
- The firm can communicate the same with the interested parties or users of Accounting Information.
- The nature of accounting is dynamic and analytical
- Accounting requires special abilities and skills in an individual to interpret the information better and effectively.
Functions of Accounting
- Identifying: Recognizing and selecting financial transactions and events that should be recorded in the books of accounts.
- Recording: Systematically documenting financial transactions in chronological order in the books of accounts.
- Classifying: Grouping recorded transactions into appropriate ledger accounts to organize financial data.
- Summarizing: Compiling classified data into financial statements like the income statement and balance sheet.
- Analysing: Evaluating financial information to assess performance, profitability, and financial position.
- Interpreting: Explaining the meaning and implications of financial results to aid decision-making.
- Communicating: Presenting financial information clearly to stakeholders such as investors, managers, and creditors.
Branches of Accounting
- Financial Accounting: Records transactions and prepares financial statements for external users like investors and creditors.
- Cost Accounting: Determines and controls the cost of production to improve efficiency and reduce expenses.
- Management Accounting: Provides information to management for planning, decision-making, and performance evaluation.
- Tax Accounting: Handles tax calculations, tax return preparation, and compliance with tax laws.
- Auditing: Examines financial records to ensure accuracy and compliance with accounting standards.
- Government Accounting: Manages financial records of government organizations and ensures proper use of public funds.
- Forensic Accounting: Investigates financial fraud and disputes using accounting, auditing, and investigative skills.
Accounting Information
It is defined as the information provided by an organization in its financial statements for different internal and external users. An organization prepares the accounting information with the help of the Book-keeping process. The process helps the different users in understanding the financial position and profitability of the organization and make financial decisions accordingly.
- Reliability: It is the ability of a user to depend on the information provided by an organization. Accounting information can be stated as reliable if it is free from errors any kind of personal bias. In other words, the information provided by an organization must be verifiable and based on proper facts.
- Relevance: It is the ability of information to meet the users' needs and help them make important decisions. The information provided by the organization must be available to the users on time and hence, help them in forecasting.
- Understandability: It means presenting the accounting information of an organization in a way that the users can understand it in the same sense as the organization wants to convey. With proper understandability only, an organization can communicate effectively with the different users of accounting information.
- Comparability: Relevance and Reliability of the accounting information is not enough; it should also be comparable. It means that the organization should use the same measures of reporting and accounting principles, so the users can effectively compare the current year's reports with the previous years'.