Concept and Nature of Accounting

Definition of Accounting
(The term “Accounting” has been technically defined in various ways by different recognized
accounting association worldwide)

As defined by AICPA
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 other hand, the Financial Reporting Standard Council (FRSC), which adopted the
standards issued by the International Accounting Standard Board (ISAB) defines accounting as
follows:
“Accounting is a service activity, its function is to provide quantitative information,
primarily financial in nature, about economic entities, that is intended to be useful in making
economic decision.”

There are common denominators that are highlighted by the two definitions:
1. Accounting is a service activity.
2. The main objective is to provide quantitative information.
3. The information is financial in character about economic entities.
4. The information is intended in making economic decision.

In other words, accounting is a process that ultimately provides information about the economic
activities of a business entity. The usual procedures involve are:
1. Identification, measurement, and recording of business transactions;
2. Processing the quantitative information, and
3. Communication of information to interested users.

Accounting, therefore, is an analytical and constructive process of identifying, measuring,

recording the right financial information to be communicated to interested users at the right
place and at the right time. The final product of measuring and processing events and
transactions is the statement.

Also, accounting is considered an important segment in the whole management information

system. The quantitative information provided by accounting is used by managers in making
economic decisions.

U
Data Measured
b S
Transactions Communicated E
Events Processed R

Figure 1.1. Analytical and Constructive Process of Accounting

Measuring > refers to the process of determining and assigning the monetary value of business
transactions and events. Only business transactions that are quantifiable or have monetary value should
be recorded. For example, hiring an employee cannot be considered a transaction that should be give
accounting recognition since the act of hiring does not have monetary value. This type of transaction
then will not be recorded in the books of accounts.

Processing of information implies two major accounting activities to be undertaken, (a) the grouping of
similar transactions, and (b) the preparation of financial statements.

Communication > refers to the issuance of complete set of financial statements to various users and
interpretation of the data in the financial statements. The financial statements are considered the final
product of accounting.

 It is through the financial statements that the business entity can communicate itself to the
outside world and interested users. It is in line of thought that accounting is considered as the
“language of business”.

Procedural Steps in Accounting Cycle

The term “process” would imply series of interrelated activities undertaken to produce the
desired result. A delay or error in one of the process or steps brings domino effects on the
succeeding processed or steps.

The accounting process involves the following steps:

1. Analyzing transactions
2. Journalizing or recording
3. Posting
4. Preparing the trial balance
5. Adjusting entries
6. Preparing worksheet
7. Preparing the financial statements
8. Closing entries
9. Preparing the post-closing trial balance
10. Reversing entries