Accounting is defined as a process of record keeping of all financial transactions in a business.
In business, every transaction is expected to be recorded. Every business has multiple transactions going throughout the day, and it is essential that to determine the productivity of the business, these transactions be recorded. This one accounting was discovered.
Accounting is an integral part of the business which is used to record the list of financial transactions occurring in the business. Sometimes accounting is also defined as the process of collecting, recording, studying, and reporting the financial transactions of an organization.
This summary of financial transactions that are recorded in accounting gives detailed information about the financial health of an organization, including their financial position, the operations of the company, sustainability in the market and cash flows.
The analysis of these statements also determines the productivity and financial health of the organization, which acts as a guide for further growth.
The function of accounting or account keeping is handled by the finance department in a large organization. In the case of smaller organizations and smaller businesses, it is handled by a bookkeeper or an accountant.
The primary function of these departments or people is to keep a record of all the financial transactions happening in the organization and report them to the authorities and responsible person of the company by submitting reports of Management and cost accounting.
They also determine whether a particular investment is feasible in the current market scenario and what is the amount of money that is to be invested.
In the case of small businesses and organizations, these functions are handled by an accountant or bookkeeper or at most a certified accountant. But in the case of larger organizations, a team of certified public accountants which is also known as CPA and chartered accountants (CA) along with their teams is the ones who handle these transactions and takes care of accounting.
Since businesses are spread across the globe, it is essential to have a similar accounting principle for all of the accountants to use. This is the reason why accountants use generally accepted accounting principles, which are also abbreviated as GAAP.
These principles are used in making financial statements and sharing those financial statements to the public and to shareholders. These standards are also a part of the outstanding amount, balance sheet rectification, and it is based on the double-entry method of the accounting system.
9 Features of accounting which are as follows
It is expected that the accounting principles should be feasible, predictable, and applicable. This should be easy to apply in the accounting system and should be easy enough to be implemented by everyone.
For example, if there are fixed assets shown in the balance sheet, then the replacement cost will be difficult, and variation and people will cause variation and market price. It should not change according to the people but should remain the same.
Accounting has a unique feature of recording every financial transaction. It provides a provision of recording the transaction in a detailed manner which can be used by the companies. The recording is systematic and can be done anyone who is adept in accounting basics and laws.
The recording is done by similar grouping entries under a single title which makes it easy for classifying all financial transactions.
Accounting provides a feature of classifying all of the financial transactions into a different category. These categories are grouped according to their similarities in one place. For example, all of the payments received, and the receipts will reflect in the cash book or memo book.
This helps to categorize all similar transaction under one heading, which helps in finding them makes it easier. The books in which the process of opening the accounts is completed is called a ledger.
The accounting principles are found to be useful and provide important information to the one who tries to find it in a simple way. There are different categories and headings under which different transactions are classified, which makes it for the finder to locate a particular transaction easy.
These entries are useful to determine and locate the nature of the transaction and to analyze its effect on the overall balance sheet.
A principal has relevance when it has figures and facts. Accounting principles full of figures and supporting facts which makes it very relevant. It is ensured that personal whims and biases are not included in the case of accounting, which makes it bias-free.
This is the reason why accounting is said to be objective.
Accounting is known to provide summaries of relevant and complex financial statements. Statements of cash flow, fund flow, and balance sheet are summarized simply and presented to the investors and the public.
These statements are useful for investors to make investing decisions. Summaries also provide exams on the overall financial health of the organization without taking a lot of time.
A statement such as profit and loss statement and balance sheet are mirrors of the company, and the summaries are considered to be very important statements.
All the statements which are generated by a certified auditor for finance department or even a bookkeeper can be audited and confirmed for their validity. Every entry of the accounting system is related to the financial transaction of the company, which is why the financial statement is a glimpse into the mirror of the organization.
All of these entries can be validated and confirmed to test the validity of the statement.
A summary of the financial statement can be read by any knowledgeable person and can be interpreted. The interpretation is universal and does not differ from person to person or auditor to auditor. It remains constant irrespective of the person interpreting it which gives it a feature of universality.
The interpretation can be analyzed and found out whether the financial health of the organization is in a good position or a bad position. The performance of the business can be determined with the help of accounting statements.
Accounting has a feature of repeatability owing to the established procedures and formulae. The steps in accounting are calculated based on fixed formulas. For example, in Ratio Analysis, various formulas are used to determine the various aspects of stocks, which is useful for investors.
The results obtained from these analyses can be repeated owing to the universality of the formulas and does not depend on the individual or vary with time.