This observance of accounting principles has helped developed a widely understood grammar and vocabulary for recording financial statements.
It ensures that common practices and conventions are followed, and that the common rules and procedures are complied with. The application of the principles by accountants ensures that financial statements are both informative and reliable.
These principles, which serve as the rules for accounting for financial transactions and preparing financial statements, are known as the “ Generally Accepted Accounting Principles,” or GAAP. Therefore, accounting principles based on certain concepts, convention, and tradition have been evolved by accounting authorities and regulators and are followed internationally. These companies have thousands of stakeholders who have invested millions, and they need a uniform, standardised system of accounting by which companies can be compared on the basis of their performance and value. Personal systems of accounting may have worked in the days when most companies were owned by sole proprietors or partners, but they do not anymore, in this era of joint stock companies. Obviously, if each business organisation conveys its information in its own way, we will have a babel of unusable financial data. The government, which decides how much tax should be collected from the company.Analysts and brokerage firms dealing with the company’s stock.Investors who want to know how the business is doing.While a small business may have an accountant or a bookkeeper to record money transactions, a large corporation has an accounts department, which supplies information to: The job of accounting is done by professionals who have educational degrees acquired after years of study. Accounting uses a formalised and regulated system that follows standardised principles and procedures. Recording every financial transaction is important to a business organisation and its creditors and investors. The art of recording, classifying, summarising 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.Īccounting not only records financial transactions and conveys the financial position of a business enterprise it also analyses and reports the information in documents called “financial statements.” The American Institute of Certified Public Accountants defines accounting as:
The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.
However, a short and sweet description of accounting does exist:Īccounting is the language of business efficiently communicated by well-organised and honest professionals called accountants.Ī more academic definition of accounting is given by the American Accounting Association: The worldview of accounting and accountants may certainly involve some unhelpful characters poring over formidable figures stacked up in indecipherable columns. Accounting Concepts, Principles and Basic Terms
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