What do you call the process of identifying recording and communicating economic events of an entity?

DEFINITION OF ACCOUNTING:

The word ‘Accounting’ comes from the Latin word ‘Calculi’ which means to count. Accounting is the art of recording, classifying, reporting and interpreting the financial data of an organization.

 “Accounting refers to the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information”.—-AAA 1966

In 1970 the AICPAstated that the function of accounting is “To Provide quantities information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”

“Accounting is the process used to measures & report to various users’ relevant financial information regarding the economic activities of an organization or unit.”–FASB

 “Accounting is the art of recording, classifying, reporting and interpreting the financial data of an organization.”

                                                                                                          —–Pyle & Larson

Accounting is an information system that measures, processes, and communicates financial information about an identifiable economic entity.

Let’s take a closer look at these three activities:

1. Identifying economic events involves selecting the economic activities relevant to a particular organization. Such as the Purchase of goods from Hallmarks. The payments of wages by UODA, Collection of money form Debtors are the economic events. 
2. Recording consists of keeping a systematic chronological daily of events measured in money. Once identified, economic event s are recorded to provide a history of the organization.
3. The identifying and recording activities are of little use unless the information is communicated to interested users.

FEATURES OF ACCOUNTING:

From the following above definitions we can summarize the characteristics of accounting:

1. Accounting is an information system.
2. It identifies business transactions from events.
3. It records the identified business transactions in journals.
4. It classifies the recorded transactions in ledgers.
5. Classified transactions are then summarized in trial balance.
6. Accounting information is prepared in the form of the financial statements.
7. Dissemination of the prepared information to the users in the form of annual report.

OBJECTIVES OF ACCOUNTING:

1. Keeping permanent record
2. Determine profit or loss
3. Determine financial condition
4. Management of cash
5. Cost control
6. Prevent errors and fraud
7. Determination of receipt and payments
8. To make planning
9. To implementation
10. Supply information to the users.

ROLE OF ACCOUNTING:

Accounting has various roles in various fields such as in the society, everyday life, the organization, an individual, creating values and accountability, technology, state, economics, public finance, banking sector, production, business and commerce etc.

The major roles of accounting are pointed out below:

1. Roles of watchdogs: Accounting performs the recording and reporting activities as a watchdog on be half of an organization.
2. Roles of caretaker: Accounting performs its activities just like a continuous caretaker to the organization.
3. Roles of Faithfulness: Accounting creates faithfulness upon the business and non-business activities of organization to the internal and external users.
4. Roles of permanent documentation: Accounting performs permanent documentation of the business and non-business activities.
5. Roles of creating values: Accounting helps to creates among persons in the organization, society and state.
6. Roles of creating accountabilities: accounting playa a vital role for creating accountabilities about performing duties by individuals and organization.
7. Roles of management: accounting is a management itself in performing its activities through a prefixed discipline.
8. Roles of decision making: Accounting helps users to makes the best decisions in any case.
9. Roles of professionals: Accounting has a very good profession in the fields of public accounting, private accounting.

FUNCTIONS OF ACCOUNTING:

Accounting has various functions in various fields such as in the society, everyday life, the organization, an individual, creating values and accountability, technology, state, economics, public finance, banking sector, production, business and commerce etc.

The major functions of accounting are outlined below:

1.      Financial transaction recording:  Accounting first function is to identify economics events and recording these into the e accounting books.

1. Classifying and summarizing the transactions:  Accounting classifies all recorded business transactions and posting to the relevant ledger accounts and prepare the trial balance for proofing the correctness of previous steps.

3.      Preparation of Financial Statements: The major functions of accounting are to prepare financial statements: Income statement, Balance Sheet, and cash flow statement.

1. Preparation of Financial Reporting: Preparing financial statements with all necessary notes and disclosers, accounting reports the users about the financial positions of the organization.
2. Providing Information: Accounting provides information of organizational activities to the user timely and effectively for taking next best action.
3. Data processing: Accounting processes all types raw data into an easy usable quality for the respective authorities.
4. Analytical and Interpreting: Accounting analyzes and interprets financial activities for next rectifications and improvements.
5. Decision making: Accounting is the basic tool for making decision by the user about their business and non-business interests.
6. Controlling: Managers control the organizational activities through accounting efforts.
7. Management consulting: Accounting is used for management consulting which ranges from the installing of basic accounting systems to helping companies determine whether they should use the space shuttle for high-tech research and development projects.

Accounting plays very important functions in all types of financial activities.

USERS OF ACCOUNTING INFORMATION:

The information that a user of financial information needs depends upon the kinds of decisions the user makes. The users of accounting information into two broad groups: a) Internal users and b) External Users.  

a) Internal Users are:

1. Shareholders
2. Enterprise Managements
3. Internal Auditors

b) External Users are:

1. Creditors
2. Trade union
3. Employee association
4. Lending agencies
5. Tax authority
6. Investors
7. Government
8. Regulatory agencies
9. Public /customers
10. External auditors
11. Academicians / Researchers

The users of the Accounting Information are shown in a diagram below:

THE PURPOSES AND THE USE OF FINANCIAL INFORMATION:

 The accounting informationreveals many vital important financial information & data which is the great magnitude to different parties who are directly or indirectly related to the business concern. This information is such a point by which anybody can easily realize the real financial position of the business enterprise.

The purposes and the use of financial information are given below in details:

The Accounting Process has the following three steps:

1. Identification
2. Recording
3. Communication

The steps in accounting process are as follows:

They are briefly discussed bellow:

1. Identification: The first step of accounting process is identification of economic events. Accounting identifies economic events, which involves selecting the economic activities relevant to a particular organization. The examples of economic events are sales of goods by Clearwater Corporation, the payment of wages by Aromatic Cosmetic Ltd., The purchase of machine by Moumita Ltd.
2. Recording: The second step of accounting process is recording of economic events. Accounting records economic events by keeping a systematic, chronological diary of events, measured in monetary unit to provide a history of organization’s financial activities. The examples of recording are Journalizing, Posting Ledger books etc.
3. Communication: The third step of accounting process is communication of economic events. Accounting communicates between organization and interested users by providing financial information through accounting reports. The examples of accounting report are Income statement, Balance sheet, Cash flow statement etc.

ACCOUNTING INFORMATION SYSTEMS:

 The system that collects and process transactions data and disseminates financial information to interested parties is known as the accounting information. It includes each of the steps in the accounting cycle. An accounting information system may be eight manual or electronic.

ACCOUNTING IS AN INFORMATION SYSTEM:

Accounting is an information system because accounting collects and process transactions data and disseminates financial information to interested parties for their decision making purpose.  Accounting as an Information System is shown in a diagram below:

From the above discussion we can say that Accounting as an Information System.

PRINCIPLES OF ACCOUNTING INFORMATION SYSTEM:

Efficient and effective accounting information systems are based on certain basic principles. These principles are: (1) Cost effectiveness (2) Usefulness and (3) flexibility.

The three basic principles of accounting information systems are described as follows:

1. Cost effectiveness: The accounting system must be cost effective. Benefit of information must outweigh the cost of providing it. It has also a quality of cost informative.
2. Useful output: To be useful, information must be understandable, relevant, reliable, timely and accurate. It follows the accounting information must be useful to the internal and external users. It helps the users to take decision based on accounting information. So design of accounting systems must consider the needs and knowledge of various users.
3. Flexibility:  The accounting system should accommodate a variety of users and changing information needs. The system should be sufficiently flexible to meet the resulting changes in the demands made upon it.

If the accounting system is cost effective, provides useful output and has the flexibility to meet future needs, it can contribute to both individual and organizational goal.

DEVELOPING AN ACCOUNTING SYSTEM:

Good accounting systems do not just happen. They are carefully planned, installed, managed and refined. Generally, an accounting system is developed in the following four phases:

1. Analysis: The stating point is to determine the information needs of internal and external users. The system analyst then identifies the sources of the needed information and the records and procedures for collecting and recording the data. If existing system being analyzed, its strengths and weakness must be identified.
2. Design: A new system must be built from the ground up: forms and documents designed, methods and procedures for collecting selected, job descriptions prepared, controls, integrated, report, report formatted and equipment selected. Redesigning an existing system may involve only minor changes or complete overall.
3. Implementation: Implementation of new or revised systems requires that documents, procedures, and processing equipment be installed and made operational.  Also, personnel must be trained and closed supervised through a starting up period.
4. Follow- up: After the system is up and running, it must be monitored for weaknesses or breakdown. Also, its effectiveness must be comp pared to design and organizational objectives. Changes in design or implementation may be necessary.

Highlight the relationship of these four phases in the life cycle of the accounting system. Phases in developing of an accounting system: 

DISTINGUISH BETWEEN BOOKKEEPING AND ACCOUNTING

Many individuals imperfectly consider Bookkeeping and Accounting are same. Actually Bookkeeping is the part of accounting that process of recording only the economic events. But Accounting is an information system of identifying, recording and communicating economic events.

There are some basic differences between Bookkeeping and Accounting in mentioned bellow:

SOME SIGNIFICANT TERMS USED IN THE ACCOUNTING:

• Accounting Concept: An abstract idea that serves as a basis in the interpretation of accounting information.
• Accounting Constraints: Constraints permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information.
• Accounting Equation: Assets must equal the sum of liabilities and owner’s equity.  Accounting Equation is the relationship between three basic elements of accounting.The basic Accounting Equation isAssets = Liabilities + Owner’s Equity.
• Accounting Information System: Accounting Information System is a system that collects and processes transaction data and disseminates financial information to interested parties.
• Accounting Principles: A broad rule adopted by the accounting profession as a guide in measuring, recording and reporting the financial affairs and activities of a business.
• Accounting: Accounting is the art of recording, classifying, reporting and interpreting the financial data of an organization.” Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users.
• Accounts Payable:  A debt owed to a creditor for goods or services purchased on credit.
• Accounts Receivable: An amount receivable from a debtor for goods or services sold on credit.
• Accounts: An Account is an individual accounting record of increases and decreases in a specific asset, liability or owners’ equity item.
• Accrual Basis of Accounting: Accounting basis in which transactions that change a company’s financial statement are recorded in the periods in which the events occur is called Accrued basis accounting.
• Assets:  Assets are the business resources that have probable future economic benefit. Asset is the future benefit from the past sacrifice.
• Auditing: The examination of financial statements by a certified public accountant in order to express an opinion as to the fairness of presentation.
• Balance Sheet: A financial statement showing the assets, liabilities, and owners equity of an enterprise on a specific date.
• Book Keeping: A part of accounting that involves only the recording the economic events.
• Budgeting: The phase of accounting dealing with planning the activities of an enterprise and comparing its actual accomplishments with the plan.
• Cash Basis of Accounting: Accounting basis in which revenue is recorded when cash is received and an expense is record when cash is paid is called Cash basis accounting.
• Chart of Accounts: A list of accounts and account numbers that identify their location in the ledger.
• Cost Accounting: The phase of accounting that deals with collecting and controlling the cost of producing a given product or service.
• Cost: Cost as “an exchange price, a forgoing, sacrifice made to secure benefit”. Cost is the value exchanged at the time something is acquired.
• Credit: The term Credit means right.  Crediting means entering an amount on the right side of an account.
• Debit: The term debit means left. Debiting means entering an amount on the left side of an account.
• Double Entry System: A system that records in appropriate accounts the dual effect of each transaction.
• Drawing: Withdraw of cash or other assets from an unincorporated business for the personal use f owner.
• Ethics: The standards of conduct by which one’s actions are judges as right or wrong, honest, or dishonest, fair, or not fair.
• Expense: The cost of assets consumed or services used in the process of earning revenue.
• Financial accounting: The field of accounting that provides economic and financial information for investors, creditors, shareholders, and others external users.
• Financial Statements: Financial statements are the principal and significant means through which financial data is communicated with others outside of a business concerns.
• Finished goods: Inventories consist of units of product that have been complete but have not yet.
• GAAP: Common set of standards indicate how to report economic events.
• General Leger: A ledger that contains all assets, liabilities and owner’s equity accounts.
• Income Statement: A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.
• Income-is the differences between the revenues and expenses of an economic entity.
• Journal: Journal is an accounting record in which transactions are initially recorded in chronological order.  
• Ledger: The entire group of accounts maintained by a company.
• Liabilities: Liabilities are probable future sacrifices of economic benefits.
• Loss: Failure to use of assets is known loss.
• Managerial Accounting: Managerial Accounting is a field of accounting that provides economic and financial information for managers.
• Net Income: The amount by which revenues exceed expenses.
• Net loss: The amount by which expenses exceed revenues.
• Owner’s Equity: Equity of the owner is the residual interest in the assets of a business entity that remains after deducting its liabilities.
• Posting: The procedure of transferring journal entries to the ledger accounts is called posting.
• Raw materials: Raw materials are the materials that are used to make a product.
• Revenue: An inflow of assets or an economic entity, not necessarily cash in exchange for goods or services sold.
• Statement of Cash: A financial Statement that summarizes information about cash inflows (Receipts) and cash outflows (payment) for a specific period of time.
• Subsidiary Ledger: A subsidiary Ledger is a group of accounts with common characteristic.
• Transaction:  The economic events of an enterprise that are recoded by accountants.
• Trial Balance: A trial balance is a list of accounts and their balances at a given time.
• Voucher: Voucher is business paper used in summarizing a transaction and approving it for recording and payment.
• Work in process: Work in process inventories consist of units of product that are only partially complete and will require further work before they are ready for sale to a customer.

ELABORATION THE FOLLOWING TERM:

IASC STANDARDS UP TO 2005: