Accounting – definition and meaning

Accounting is the work or process of keeping financial records. We also call it accountancy. It is the systematic recording, reporting, and analysis of the financial activity (transactions) of a person, business, or organization. In business, it allows companies to analyze their financial performance.

Additionally, accounting allows businesses to examine their results regarding profits, losses, productivity, sales trends, costs, etc.

Accountancy is an information science we use to gather, classify, and manipulate financial information. Not only companies, but also individuals, charities, and many other entities are familiar with accountancy.

It is instrumental in companies and other organizations as a means of determining financial stability.

Accountancy specialists are accountants. They are responsible for determining an organization’s overall wealth and profitability. They can also determine its liquidity.

In fact, accountants probably know more about a company’s performance than anybody else.

When you need to know a company’s financial health, you should probably ask an accountant.

Accountancy is a language you use to communicate the story of your company to people. Typically, the story varies depending on whether they are insiders, outsiders, or the tax authorities. For example, the most common accounting for external people is called GAAP (Generally Accepted Accounting Principles). The US tax authorities, on the other hand, will want to hear your story using the Internal Revenue Code (IRC).


Accounting crucial for decision-making

Without accountancy, it would be virtually impossible for businesses to be able to make short-term and long-term decisions. We make most of our commercial decisions after using accountancy data.

We decide how much to spend on marketing, R&D, and reinvesting profits after examining the company’s accounts.

According to the Rochester Institute of Technology’s Saunders College of Business in New York:

“Accounting is one of the oldest and most respected professions in the world, and accountants can be found in every industry from entertainment to medicine. It one of the most necessary lines of work on the planet.”

We sometimes refer to accountancy as ‘the language of business.’ It measures the results of a company’s economic activities.

Accountants convey this data to a wide range of users, including the company’s management, shareholders, and creditors. They also convey the data to regulators.

Furthermore, investors will never consider purchasing shares in a company without first examining its accounts.

Luca Pacioli the father of acccounting
Luca Pacioli (1447-1517), an Italian mathematician and Franciscan friar, is referred to today as ‘The Father of Accounting and Bookkeeping.’ He was the first person to publish a work on the double-entry system of bookkeeping. (Image: Wikipedia)

The word ‘accounting’ comes from the noun ‘account’. It originated from Old French ‘acont’ meaning ‘account, reckoning or terminal payment.’ The Old French term came from Latin ‘computus’ meaning ‘calculation.’


History of accounting

Accounting has been around for many thousands of years. In fact, it can be traced back to very ancient civilizations.

Economic historians say there is evidence it existed approximately five thousand years ago in ancient Mesopotamia.

Many say that accounting probably developed alongside our ability to write words, count numbers, and start using money.

There is evidence that basic bookkeeping existed in ancient Iran, while the ancient Egyptians appear to have had an early auditing system. In fact, even the Babylonians, four thousand years ago, had an early auditing system.

Roman Emperor Augustus had access to detailed financial data throughout his life. He ruled from 27 BC until 14 AD.

Medieval Europe saw the emergence of double-entry bookkeeping. During this period, accounting split into management and financial accounting.

In fact, the two types of accounting coincided with the development of joint-stock companies. Shareholders (stockholders) own a joint-stock company.

The United Kingdom saw the emergence of accountants as an organized profession in the 19th century. Local professional bodies in England merged to form the Institute of Chartered Accountants in England and Wales in 1880.

According to BusinessDictionary.com, accounting is:

“Practice and body of knowledge concerned primarily with methods for recording transactions, keeping financial records, performing internal audits, reporting and analyzing financial information to the management, and advising on taxation matters.”

“It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information.”

In accounting, a journal is where we register all a company’s financial transactions.