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Definition of Accounting
Let us examine three popular definitions on Accounting
Accounting has been defined by the american accounting association committee as:
“the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information”.
This may be considered as a good definition because of its focus on accounting as an aid to decision making.
The american institute of certified and public accountants committee on terminology defined accounting as:
“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 thereof”.
of all definitions available, this is the most acceptable one because it encompasses all the functions which the modern accounting system performs.
Another popular definition on accounting was given by american accounting principles board in 1970, which defined it as:
“accounting is a service society. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is useful in making economic decision, in making reasoned choices among alternative courses of action”.
This is a very relevant definition in a present context of business units facing the situation of selecting the best among the various alternatives available. The special feature of this definition is that it has designated accounting as a service activity.
Accounting is a set of concepts and techniques that are used to measure and report financial information about an economic unit. The information is potentially reported to a variety of different types of interested parties. These include business managers, owners, creditors, governmental units, financial analysts, and even employees. In one way or another, these users of accounting information tend to be concerned about their own interests in the entity.
Business managers need accounting information to make sound leadership decisions.
Investors hold out hope for profits that may eventually lead to distributions from the business (e.g., “dividends”).
Creditors are always concerned about the entity’s ability to repay its obligations.
Governmental units need information to tax and regulate.
Analysts use accounting data to form their opinions on which they base their investment recommendations.
Employees want to work for successful companies to further their individual careers, and they often have bonuses or options tied to enterprise performance.
Accounting information about specific entities helps satisfy the needs of all these interested parties. The diversity of interested parties leads to a logical division in the discipline of accounting:
Financial accounting - concerned with external reporting of information to parties outside the firm.
Managerial accounting - primarily concerned with providing information for internal management.
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