Definition Of Accounting :

The definition given by the American Institute of Certified Public Accountants (‘AICPA’) clearly brings out the meaning of accounting. According to it, 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”. The definition brings out the following as attributes of accounting :

(i) Accounting is an art. Accounting is classified as an art, as it helps us in attaining our aim of ascertaining the financial results, that is, operating profit and financial position through analysis and interpretation of financial data which requires special knowledge, experience and judgment.

(ii) It involves recording, classifying and summarizing. Recording means systematically writing down the transactions and events in account books soon after their occurrence. Classifying is the process of grouping transactions or entries of the same type at one place. This is done by opening accounts in a book called ledger. Summarizing involves the preparation of reports and statements from the classified data (ledger), understandable and useful to management and other interested parties. This involves preparation of final accounts namely profit and loss account and balance sheet.

(iii) It records transactions in terms of money. All transactions are recorded in terms of common measure i.e. money which increases the understanding of the state of affairs of the business.

(iv) It records only those transactions and events which are of financial character. If an event has no financial character then it will not be capable of being measured in terms of money ; it will not be, therefore, recorded.

(v) It is the art of interpreting the results of operations to determine the financial position of the enterprise, the progress it has made and how well it is getting along.