1 WHAT IS ACCOUNTING?- MEANING AND IMPORTANT CONCEPTS
WHAT IS ACCOUNTING? -MEANING AND IMPORTANTCONCEPTS
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 Jonathon 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:
1. 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.
2. 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.
Foe 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
3. Reporting
Management is answerable to the investors about the company's state of affairs. The owners need to be periodically updated about the operations that are being financed with their money. For this reason, there are periodic reports which are sent to them.
Usually the frequency of these reports is quarterly and there is one annual report which summarizes the perfomance of all four quarters. Reporting is usually done in the form of financial statements. These financial statements are regulated by government bodies to ensure that there is no misleading financial reporting.
4. Analyzing
Lastly, accounting entails conducting an analysis of the results. After results have been summarized and reported, meaningful conclusions need to be drawn. Management must find out its positive and negative points. Accounting helps in doing so by means of comparison. It is common practice to compare profits, cash, sales, assets, etc with each other to analyze the performance of the business.
HISTORY OF ACCOUNTING
One can never really understand a subject, unless they know where it came from. Therefore, a short history of the subject of accounting may be of interest to students of accounting. Here is a very brief history of how accounting evolved:
. Single Entry Accounting System
Accounting is as old as financial transactions themselves. As soon as credit was invented, humans began to use accounting to simplify their lives. As expected, the oldest system of accounting used single entry accounting. This is the most intuitive form of accounting but is also incomplete. Records have been found on clay tablets in ancient Mesopotamia that show the existence of single entry accounting in that time.
. Bahi-Khata System
Prior to rise of European commerce in the Medieval Ages, India was the primary center for bustling trade and commercial activity. Although there has been no record of this fact, but is claimed that India merchants had very advanced accounting systems at that time. These systems were called the Bahi-Khata systems. It is rumored that the westerners designed the double entry system based on the principles of Bahi-Khata system but once again there is no conclsive proof.
. Merchants of Venice
The birthplace of modern day accounting is Venice. In the Medival Ages, Venice was a center of trade and commercial activity. Merchants had giant businessess and they were struggling to run these corporations efficiently. It is then that Luca Pacioli developed the double entry accounting system. There is still debate about whether he developed it or just improved it and made it available to the merchants. However, debate or no ebate, Luca Pacioli is considered to be the ''Father of Modern Day Accounting.''
. Chartered Corporations
In the era of colonialism, chartered corporations were common. The government would approve certain companies and give them exclusive rights to trade with certain colonies. Citizens were encouraged to invest in such companies. Shares of a few such companies had paid rich dividends and hence it was common to invest in such companies.
However, the performance of such companies had to be reported to the shareholders on a periodic basis. Therefore accounting systems were further developed. They were now providing information to external shareholders apart from providing information to internal management.
. Modern Accounting
The Chartered companies have long gone. The world is now a free market. But information still needs to be provided to the external shareholders about the conduct of operations. Accounting, therefore has been further developed and is highly reguated in most countries.
