Home » Accounting Explanation » Introduction to Accounting and its Terminology


Accounting definition

Accounting can be defined as the process of collecting, recording, summarizing and communicating the financial information of a business

Accounts are the records in which this financial information is recorded.

Keeping the most basic records is called Book Keeping

The Profession responsible for collecting, recording, summarizing and communicating the financial information is known as Accountancy profession. For example an Accountant

Book Keeping

Book keeping is the art of recording the financial information. For example keeping the record sale of goods

What’s difference between Accounting and Book Keeping?

Book keeping only involve in recording the financial information while accounting collects, records, summarizes and communicates the financial information

Booking is just one basic phase of accounting the recording phase

Why should we keep Accounts?

Man has been keeping accounts for thousands of years because they help to keep track of money, by showing where did money come from and how we have spent it

Different fields of accounting or branches of accounting

Financial accounting
It is the general accounting field engages in recording and communicating financial information

Cost accounting
It is specialized field of accounting involves in controlling the cost of production and distribution

Management accounting
It concerns in selecting best method of accounting among various alternatives

Government accounting
It is generally single entry system used in recording government transactions e.g. recording revenue, expenditure, taxes and preparing budget

Auditing
It is the examination of accounting records to check the fairness and accuracy


Objectives and functions of accounting

  • First and the foremost objective of accounting is to maintain accounts to tack inflow and outflow of money and to keep financial information safe 
  • By keeping accounts businesses protects their properties because accounts help in tracking misappropriation and frauds 
  • Legal requirements of a country for various reasons. For example it serves as a base for income tax calculation 
  • Accounting information is helpful in communicating the profitability, financial position or financial results of a business entity to interested parties or Stake holders


Stakeholders, interested parties or parties interested in accounting information

  • First off, the business owner want to know the financial position of business whether the business is in profit or in loss
  • Investors because they want to invest in the business (e.g they purchase shares, bonds etc.)
  • Loan provider, banks and creditors want to know the business profitability and financial position
  • Management of business needs information for the decision-making
  • Business employees want to know the business stability, future prospects and business scope for their own welfare in the business organization
  • Government for the income tax purpose and government agencies for various other purposes