Accounting – definition and meaning

Accounting is the work or process of keeping financial records. 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.

According to BusinessDictionary.com, accounting is the “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.

Accounting tells a story  

This narrative is crafted through meticulous financial analysis and strategic interpretation, revealing the nuances of the business’s economic journey.

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).

Accountants

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 or someone who works in fintech.

Do not confuse accountants with bookkeepers, who are responsible for recording a company’s financial transactions, i.e., bookkeeping.

Accounting vs. accountancy

Accountancy vs accountingThe terms ‘Accounting’ and ‘Accountancy’ are commonly used with the same meaning today. However, they are not the same.

According to Alexander & Co, a Manchester-based firm of chartered accountants that specialises in entrepreneurs:

“Accountancy is the whole field. It includes accounting, bookkeeping, and auditing. Accounting is one of the three principles of accountancy, together with auditing and bookkeeping.”

Accounting crucial for decision-making

Without accounting, 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 this type of 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)

Etymology of the word ‘accounting’

Etymology is the study of the origin of words and how their meanings evolved over time.

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.

Derivatives of “account”

The word “accounting” is a derivative of “account.” Let’s look at some more derivatives, their meanings, and how we can use them in a sentence:

  • Account (Noun)

A record or narrative description of past events.
Example: “She gave a detailed account of her holiday.”

  • Account (Verb)

To consider or regard in a specified way.
Example: “The event is accounted a success.”

  • Accountable (Adjective)

Expected to answer for one’s actions; responsible.
Example: “Managers are accountable for their team’s performance.”

  • Accountability (Noun)

The fact or condition of being accountable; responsibility.
Example: “There is a lack of accountability in the team.”

  • Accountant (Noun)

A person whose job is to keep or inspect financial accounts.
Example: “She hired an accountant to manage her taxes.”

  • Accountancy (Noun)

The profession or duties of an accountant.
Example: “He studied accountancy at university.”

  • Accounting (Noun)

The skill or practice of maintaining and auditing accounts and preparing reports on the assets, liabilities, etc., of a business.
Example: “She works in accounting for a major corporation.”

  • Unaccountable (Adjective)

Not required or expected to justify actions or decisions; not responsible.
Example: “The committee’s decisions sometimes seem unaccountable.”

  • Unaccountably (Adverb)

For reasons that are not clear; inexplicably.
Example: “Unaccountably, he felt a sense of foreboding that morning.”

  • Accountable (Adjective)

Subject to the obligation to report, explain, or justify something; responsible; answerable.
Example: “The CEO is accountable to the board of directors.”

Video – What is Accounting?

This video presentation, from our YouTube partner channel – Marketing Business Network, explains what ‘Accounting’ means using simple and easy-to-understand language and examples.