Definition: Accounting is the process of identifying and recording business events as well as presenting and communicating this financial information to end-users in a meaningful way. In other words, accounting is more than just recording the debits and credits of transactions. Accounting is really a system or process of recording information and displaying it to people in an understandable way, so that they can make decisions based on the financial information.
What Does Accounting Mean?
The accounting process starts with identifying a business event or transaction. First, we can to identify something to record before we can record it. : ) For example, assume Sally purchases a truck from Bob’s Auto Mart for $10,000 and signs a 3-year $8,000 note payable. This purchase is a business transaction that can be measured and changed the accounting equation. Thus, it must be recorded.
After we identify a transaction that needs to be recorded, we record a journal entry in a double entry accounting system. In this case, Sally would record a debit of $10,000 to the vehicle asset account and a credit of $8,000 to the notes payable account, and a credit of $2,000 to the cash account. Both debits and credits are always recorded to reflect every business transaction.
Example
Accounting doesn’t just stop when the journal entry has been recorded. The entire purpose of accounting is to provide useful information to end-users. Not that we have financial information, the journal entries, we have to present them in a way that makes sense to investors, creditors, and anyone else who is looking to make decisions about the company. The accounting process culminates in the creation of the general purpose financial statements. These reports communicate the financial position of a company to decision makers and end-users.
Identifying, recording, and communicating financial information to end-users is the essence of accounting.
