Accounting Definition – Meaning and Importance

accounting definition

Accounting Definition and Importance

Accounting Definition – “It refers to the process of recording, classifying, summarizing , analyzing and interpreting the end results to the users”

In simple words, Accounting is a systematic record of  all the financial transactions, then classifying them and summarizing them in order to provide the useful information to the end users. These are Company, employees, investors, banks, general public, financial institutions, creditors, etc.

Recording in accounting means recording each and every transaction on daily basis in the books of accounts. For recording purpose, Journal is prepared. Journal is a book which consists of recording of transactions in the chronological order that is when they occur. However, with the advancement of technology, computer is used to record the transactions.

Recording of transaction is the first step. However from the organisation point of view it is not much useful as it contains only raw data. So the data of similar nature is divided into various categories. This is done through the use of ledger which consists of various accounts. For example all the sales are recorded in Sales A/c and purchases in Purchases account.

Now the data is analyzed, that is meaningful conclusion is withdrawn from the summarized data. This is very helpful for comparing one organisation with the other organisation. In addition to this, same organization performance can be compared with rest to the previous years of its working. This is know as the interpretation.

Importance of Accounting

In order to run business successfully, profit is very important. And for doing so business enters into various transactions, made expenses, provides goods and services and earn revenues in return. Now the question arises, how an entity analyze whether the business is having losses or earning profits. Here comes the role of accounting. With the help of accounting the day to day transactions are recorded, then the data is arranged in different categories and a conclusion is drawn

Related Financial Terms of Gross Profit

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