ACCOUNTING

DEFINITION OF ACCOUNTING
1. American Institute of Certified Public Accountants (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 financial character, and interpreting the results thereof.” –

2. American Accounting Association (AAA)

“Accounting is the process of identifying, measuring and communicating
economic information to permit informed judgment and decision by users of
the information.” –

3. Accounting Standards Council (ASC), succeeded by Financial

Reporting Standards Council (FRSC).
“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.” –

NATURE OF ACCOUNTING
 Primarily, Accounting is by nature a service activity. Accounting is a
service of providing information required by different interested groups
through the preparation of the financial statements.

 Accounting is an art and science of tracking monetary events.

Accounting is considered an art because it requires the use of skills and
creative judgment.
Accounting is also considered a science because it is a body of knowledge
and a discipline.

 Accounting is a continuous process for giving the interested users

information.
Accounting is identified as a process as it performs the specific task of
collecting, processing and communicating financial information.

Accounting process
From the definitions above, we can have the following processes and phases
of accounting:
1. Identifying – this is the process of recognition or nonrecognition of
business activities as accountable (or recordable) events. To recognize is
synonymous to ‘to record’ or ‘to journalize’.
2. Measuring – this is the process of assigning amounts or value to the
accountable economic transactions and events. It answers the question of
‘how much’.
3. Communicating – this is the process of preparing and distributing
accounting reports to potential users of accounting information. This
process includes the following phases:
a. Recording – also called journalizing, involves the preparation of
entries of transactions and events on the books of accounts ( General
Journal Book, also called the book of original entry) in a chronological
order in accordance with established accounting rules and
procedures.
b. Classifying – this involves sorting or grouping of similar and
interrelated transactions and events into their respective classes or
account. This is performed by posting accounts to ledger, otherwise
known as the book of final entry.
c. Summarizing – this involves the preparation of financial
statements, which includes the statement of financial position
(balance sheet), Profit or Loss (income statement), statement of equity,
statement of cash flows and accompanying notes to the financial
statements.

4. Interpretation involves analyzing the liquidity, solvency, stability and

profitability of an entity. This aspect is thoroughly discussed in
Managerial Finance.