Accounting as a Language of Business

Topics: Balance sheet, Generally Accepted Accounting Principles, Income statement Pages: 28 (5990 words) Published: December 1, 2011
1. Define accounting?

Answer to the Question no. 1

Definition of Accounting:

“Accounting is an information system that identifies, records and communicates the economic events of an organization to interested users.” —Kieso, Weygandt, Kimmel-Accounting Principles.

“Accounting refers to the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.” —The American Accounting Association.

“Accountancy may be defined as the collection, compilation and systematic recording of business transactions of money, the preparation of financial reports, the analysis and interpretation of these reports and the use of these reports for the information and guidance of management.” —A. W. Johnson.

“Accounting is the art of recording, classifying and summarizing in significant manner and in terms of money transactions and events which are, in part at least, of a financial character and interpreting the result thereof.” —American Institute of Certified Public Accounts (AICPA).

After discussing the above definitions we can say that Accounting is concerned with the processes of recording, sorting and summarizing data resulting from the business operations and events. Or in other words accounting means-

1. Systematic classification of business transactions for recording them in books of account. 2. Recording of events and transactions in books of account - called Bookkeeping. 3. Summarizing of the recorded events i.e., Preparation of a trial balance from a ledger and subsequently preparation of balance sheet and profit and loss account from the trial balance. 4. Interpreting the financial transactions from the recorded data and financial statement.

2. What are the objectives of accounting?

Answer to the Question no. 2


The main objective of accounting is to provide information to the users to make relevant decisions and form judgment.

Let us now elaborate a little on the Primary Objectives.

The main objectives of accounting are as follows:

Figure: Objectives of accounting

Let us now discuss these objectives one by one:

1. To maintain accounting records:

Written records are always better than oral records. Different persons can use written records for different decision-making purpose. It also serves as evidence of transactions. Human memory cannot absorb each and every transaction.

2. To calculate the results of operations:

To measure the financial performance of an enterprise, i.e. preparing the Income statement.

3. To ascertain the financial position:

To evaluate the financial strength and weaknesses of an enterprise, the financial position is ascertained by preparing the position statement or the balance sheet.

4. To communicate the information to the users:

Accounting communicates information to internal users and the external users.

3. Discuss the importance of accounting.

Answer to the Question no. 3

Importance of Accounting: In the competitive world, Accounting has become an integral part of the business world. It guides and advises the business on a day-to-day basis. The importance of Accounting are given below:

1. Facilitates to Replace Memory:

Accounting facilitates to replace human memory by maintaining a complete record of financial transactions. Human memory is limited by its very nature. Accounting helps to overcome this limitation.

2. Facilitates to Comply with Legal Requirements:

Accounting facilitates to comply with legal requirements of an enterprise to maintain books of accounts.

3. Facilitates to Ascertain Net Result of Operations:

Accounting facilitates to ascertain net results of operations by preparing income statement.

4. Facilitates to Ascertain Financial Position:

Accounting facilitates to ascertain...
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