Accounting is the language of business because it offers a methodical way to record, analyze, and communicate financial data. It is a crucial process that aids individuals, businesses, and organizations in meeting legal obligations, making wise decisions, and improving their comprehension of their financial performance.
Accounting’s central functions are the measurement, processing, and exchange of financial data relating to economic entities. These entities may be small businesses, government organizations, big corporations, or nonprofits. The primary goal of accounting is to give stakeholders fast, accurate, and trustworthy information about a company’s financial health and performance.
Accounting Definition
What is Accounting? Accounting means it is a comprehensive system to analyze communication of financial transactions. In other words meaning of accounting is a financial language which assists you in measuring your growth year on year.
Accounting language was introduced as soon as paper money was used for exchange. Since initially volume of the transactions was not as huge as today, individuals were able to manage their transaction records. According to Indian history, an scholar Kautilya Pandit (also known as Chanakya or Vishnu Gupta) introduced the concepts of accounts in his Arthashastra book during the period of the Maurya Empire (322-185 BCE) around 23 centuries ago. He defined the art of maintaining accounts and various approaches of checking accounts.
The American Institute of Certified Public Accountants (AICPA) defines Accounting. It classifies, records, and summarizes events and transactions. These are significant and in terms of money. They are at least partially of a financial character. The AICPA also interprets the results thereof. This definition summarizes that:
- It helps to monitor our success through analyzing and summarizing financial transaction records.
- All transactions are recorded in terms of money which is based on financial character else it won’t be considered.
- It is an art of examining operations result to determine financial position of an individual or a business and a progress of it.
What is an Accounting Equation?
There are varieties of book keeping correlation equations tactics for accounting calculation. One of the simplest way to calculate is “Assets = Liabilities + Owners equity”
Businesses own assets, which comprise tangible and intangible materials such as furniture, buildings, cars, machinery, and inventory. Liabilities, on the other hand, consist of unsettled payments that the business owes, such as bank overdrafts, loans, and creditors. Mathematical calculation of assets and liabilities gives you the valuation of owners equity.
Formula to calculate owners equity is “Owners equity = Total Assets – Total Liabilities”.
Owners equity can be further divided into capital invested + reserved capital (i.e. retained earnings). Owners equity can also be calculated as “capital invested + reserved capital = Total Assets – Total Liabilities“. Let us take an example of balance sheet to understand calculation of owners equity.
Accounting Examples
Below is an example of accounting, here you can see the sample balance sheet to understand about how the books of accounting looks like.
| Sample of Balance Sheet for the Accounting Year | ||
| ASSETS | Particulars | Amount |
| Current Assets | ||
| Cash | 50,000 | |
| Accounts receivable | ||
| Inventory | ||
| Prepaid expenses | ||
| Fixed Assets | ||
| Long-term investments | 1,00,000 | |
| Buildings | 5,00,000 | |
| (less accumulated depreciation) | (50,000) | |
| Furniture and fixtures | ||
| (less accumulated depreciation) | ||
| Plant and equipment | ||
| (less accumulated depreciation) | ||
| Net Total Assets (Current Assets + Fixed Assets) | 6,00,000 | |
| LIABILITIES | Particulars | Amount |
| Current Liabilities | ||
| Accounts payable | 10,000 | |
| Interest payable | ||
| Taxes payable | 30,000 | |
| Long-term Liabilities | ||
| Mortgage | 60,000 | |
| Other liabilities | ||
| Net Total Liabilities (Current Liabilities + Long-Term Liabilities) | 1,00,000 | |
| ASSETS – LIABILITIES | 5,00,000 | |
| Shareholders Equity | ||
| Capital stock | 4,00,000 | |
| Retained earnings | 1,00,000 | |
| TOTAL OWNER’S EQUITY | 5,00,000 | |
From the above balance sheet we can conclude that total owners equity for the current year is Rs.5,00,000. This is the primary goal of accounting and also of accountant. The balance sheet provides a clear picture to individuals or organizations about the growth and profits for the current year. It also gives them enough time to prepare strategic plans for next year’s growth and earnings. Maintaining and filing accounts are also mandatory for taxation purpose.
Conclusion
To sum up, in many economic sectors, accounting serves as the basis for financial reporting and decision-making procedures. Accounting guides stakeholders through the complexities of the business world. It helps them make wise decisions. These decisions promote long-term success and growth.
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