Page 9 - DMGT104_FINANCIAL_ACCOUNTING

Unit 1: Introduction to Accounting

There are many definitions of accounting. Some of the most important definitions are given Notes
below:
1. As per Robert N. Anthony – “Accounting system is a means of collecting, summarizing,
analyzing and reporting, in monetary terms, information about the business”.
2. The American Accounting Association (AAA) has defined accounting as, “the process of
identifying, measuring and communicating economic information to permit informal
judgments and decisions by users of information”.
3. The Committee on Terminology of American Institute of Certified Public Accountants
gave a generally accepted definition of accounting – “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.”
On the basis of above definitions we conclude that accounting is a science as well as an art of
recording of activities of the business which can be measured in money and analyzing and
interpreting them.

1.1.1 Characteristics of Accounting

On the basis of above definitions, the characteristics of accounting may be drawn as follows:
1. Accounting is the art of recording of financial transactions of the business: All those
transactions of business which are financial in nature are recorded in accounting and those
which are not of financial nature are not recorded in accounting. As the honesty of the
workers cannot be measured in money, it cannot be recorded into accounting.
2. Classifying and summarising of recorded data is done in accounting: In accounting the
financial transactions are recorded in the journal. With the help of journal, the recorded
data are classified into ledger under appropriate heads. Then with the help of ledger the
trial balance and financial statements are prepared.
3. Data are recorded in terms of money: In accounting, the financial data are recorded in a
definite term i.e. money. No other unit is accepted to record the business transaction. If
there is sale of 100 articles at the rate of 50 per article, only the monetary value of these
articles i.e. 5,000 (100 x 50) is recorded.
4. Accounting is a science also: On account of recording of business transactions in a systematic
manner, it is also called a science. First the business transactions are recorded in the
primary books i.e. journal, for classification the ledger is prepared. With the help of
ledger the trail balance, profit and loss account and balance sheet is prepared. Profit and
loss account is prepared after a period to find the result of the business and balance sheet
to know the financial position of the business.
5. Analysing and interpretation of the results is done in accounting: It not only record
classifies and summaries the business data but also analyse and interprets the results for
the future decisions. On the basis of data forecasting regarding profit, sales, etc., may be
done.

1.1.2 Objectives of Accounting

The main purpose of book-keeping and accounting is to furnish the necessary financial data to
the persons interested in the business. These persons can be the internal users of the business and
external users of the business. Among the internal users all the managers at lower, middle and
top level are included. While among the external users, investors, creditors, government and

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