What is Accounting? Definition with Examples

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 Accountant (AICPA) defines Accounting as the art of classifying, recording and summarizing in a significant manner and in terms of money, events and transactions which in part at least of a financial character and interpreting 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”

Assets are collection of tangible and intangible materials owned by business like furniture, buildings, cars, machinery, inventory, etc whereas liabilities are those unsettled payments owned by the business like bank overdraft, loans, creditors, etc.  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. Balance sheet provide clear picture to the individuals or an organisation of the growth and profits for the current year and also give them enough time to prepare strategic plans for the next year growth and earnings. Maintaining and filing accounts are also mandatory for taxation purpose.

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