What is Accounting

What is Accounting

What is Accounting?

Accounting is the various technical activities performed by accountants including financial accounting bookkeeping and Management accounting.

Accounting is considered to be as old as money however, Luca Fra Pacioli, an Italian is universally regarded as the father of the modern system of accounting or double entry system of accounting.

Accounting is the language of business because the role of accounting is to maintain and process all relevant financial information that an entity requires for its managing and reporting purposes.

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 a financial character and interpreting the results of thereof.

American institute of certified public accountant (AICPA)

Why is Accounting Important for your Business?

1. To record the business transaction or events in a systematic manner.

2. To calculate the gross profit and net profit by a firm during a specific period.

3. To know the financial position of your firm at the close of the financial year by way of preparing the balance sheet.

4. To facilitate management control

5. To evaluate the taxable income and the sales tax liability

6. To provide requisite information to different parties i.e, owners creditors employees management government investors financial institutions Bank, etc.

Function of Accounting

The various functions of accounting are as follow:


Accounting records business transactions or events in terms of money.


Accounting also facilitates the classification of all business transactions.


Accounting summarized classified information, done in a manner that is useful to the internal and external users.


It implies analyzing and interpreting the finances that are embodied in final accounts.

Information system:

Accounting also serves as an information system it collects and communicates economic information about an enterprise to a wide range of internal and external users.

All the functions which is mentioned above can be handled by a bookkeeper, advanced accounting is typically handled by qualified accountants who possess designations such as Certified Public Accountant (CPA) or Certified Management Accountant (CMA). They follow a set of standards known as the Generally Accepted Accounting Principles (GAAP) when preparing financial statements.

Cash Basis Accounting Vs Accrual accounting

Cash Basis Accounting:

In cash basis accounting, only actual cash receipts and payments are recorded in the books the credit transactions are not recorded at all till actual cash is received or paid.

Mercantile or Accrual Accounting

In the accrual system, all the business transactions pertaining to the specific period whether of cash or credit nature are recorded in the books this system of accounting is based on the accrual concept which states that revenue is recognized when it is earned and expense is recognized when the obligation of payment arises. The actual moment of cash is irrelevant.

Types of Accounting


Bookkeeping is a science of recording transactions in money or money’s worth, in such a manner that and any subsequent that their nature and effect may be clearly understood. Bookkeeping includes recording in general posting to the ledger and balancing of accounts. The work of bookkeeping is the starting work of accounting.

Financial Accounting:

financial accounting is concerned with recording and summarising financial transactions and preparing financial statements relating to the business.

Cost Accounting:

Cost accounting is concerned with the determination of the cost of the goods and services manufactured or offered by the business.

Management Accounting:

Management accounting is the use of financial and cost data for purpose of evaluating the performance of the business as a whole and of various departments in relates to pre-determined targets.

Steps in Accounting Cycle or Accounting Process:

Steps in Accounting Cycle
Steps in Accounting Cycle

1. Origination of the transaction

2. Recording the transaction in the journal.

3. Posting to the ledger.

4. Preparation of trial balance

5. Preparation of the financial statement

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