Accounting has been hailed by many as the “language of business”.
There are many quotations like “A pen is mightier than the sword but no
match for the accountant” by Jonathan Glancey which tell us about the
power and importance of accounting.
The text book definition of accounting states that it includes recording, summarizing, reporting and analyzing financial data. Let us try and understand the components of accounting to understand what it really means:
For instance a sale to Mr. X for Rs 100 would appear as:
The text book definition of accounting states that it includes recording, summarizing, reporting and analyzing financial data. Let us try and understand the components of accounting to understand what it really means:
Recording
The primary function of accounting is to make records of all the transactions that the firm enters into. Recognizing what qualifies as a transaction and making a record of the same is called bookkeeping. Bookkeeping is narrower in scope than accounting and concerns only the recording part. For the purpose of recording, accountants maintain a set of books. Their procedures are very systematic. Nowadays, computers have been deployed to automatically account for transactions as they happen.Summarizing
Recording for transactions creates raw data. Pages and pages of raw data are of little use to an organization for decision making. For this reason, accountants classify data into categories. These categories are defined in the chart of accounts. As and when transactions occur, two things happen, firstly an individual record is made and secondly the summary record is updated.For instance a sale to Mr. X for Rs 100 would appear as:
- Sale to Mr. X for Rs 100
- Increase the total sales (summary) from 500 to 600