Accounting – definition

“It is a systematic process of identifying, recording, measuring,

classifying, verifying, summarizing, interpreting and communicating
financial information.”

History of Accounting

The history of accounting has been around almost as long as money

itself. Accounting history dates back to ancient civilizations in
Mesopotamia, Egypt, and Babylon. For example, during the Roman
Empire, the government had detailed records of its finances.2
However, modern accounting as a profession has only been around
since the early 19th century.

Double-Entry Bookkeeping (15th Century):

The development of double-entry bookkeeping is credited to an

Italian mathematician named Luca Pacioli. In 1494, Pacioli published
a book called "Summa de Arithmetica, Geometria, Proportioni et
Proportionalita," which included a detailed description of double-entry
accounting. This system revolutionized accounting by introducing the
concept of debits and credits, which provided a more structured and
accurate method of recording financial transaction.

By 1880, the modern profession of accounting was fully formed and

recognized by the Institute of Chartered Accountants in England and
Wales.4 This institute created many of the systems by which
accountants practice today. The formation of the institute occurred in
large part due to the Industrial Revolution. Merchants not only needed
to track their records but sought to avoid bankruptcy as well.
Function of accounting

The functions of accounting include the systemic tracking, storing,

recording, analysing, summarising and reporting of a company's
financial transactions. Through the functions of the accounting
department, the company can maintain a fiscal history that they can
make accessible for audits. They can also use it to prepare reports,
create budgets, reduce costs, increase profits, avail growth
opportunities, assess future expenditure requirements and make
financial predictions.

1. Recording Financial Transactions: Accounting involves the systematic

recording of financial transactions, such as sales, purchases, expenses,
and cash flows. These transactions are documented in financial
documents like invoices, receipts, vouchers, and bank statements.

2. Financial Reporting: Accounting provides financial reports that

summarize the financial position, performance, and cash flows of an
organization. This includes the preparation of financial statements such
as the balance sheet, income statement, cash flow statement, and
statement of equity. These reports help stakeholders, such as investors,
shareholders, lenders, and management, make informed decisions.

3. Decision Making: Accounting information plays a vital role in decision

making within an organization. Managers and executives rely on
financial reports to assess profitability, liquidity, and the financial health
of the company. This information helps them make strategic decisions,
allocate resources, and plan for the future.
4. Planning and Budgeting: Accounting helps in the planning and
budgeting process by providing financial data and insights. It enables
businesses to set financial goals, create budgets, and monitor
performance against those budgets. By comparing actual results with
planned figures, organizations can identify areas of improvement and
take corrective actions.

5. Performance Evaluation: Accounting facilitates the evaluation of an

organization's financial performance. Key financial ratios and indicators
are calculated using accounting data to assess profitability, liquidity,
efficiency, and solvency. These metrics help measure the overall
performance and financial health of the business, enabling management
to identify strengths and weaknesses.

6. Compliance and Legal Requirements: Accounting ensures compliance

with financial regulations and legal requirements. It involves adhering to
accounting principles and standards, such as Generally Accepted
Accounting Principles (GAAP) or International Financial Reporting
Standards (IFRS). Accurate and transparent financial reporting is
essential for meeting tax obligations, regulatory requirements, and
obligations to stakeholders.

7. Facilitating Communication: Accounting serves as a common

language for communicating financial information to various
stakeholders, including investors, creditors, employees, and government
agencies. Financial statements and reports provide a standardized
format for presenting financial information, enabling effective
communication and transparency.

Overall, the function of accounting is to provide timely and accurate

financial information, enabling stakeholders to make informed decisions,
evaluate performance, and ensure compliance with legal and regulatory
requirements.
Users of accounting

These users can be categorized under external and internal users. This
is shown in the diagram below.

Internal Users of Accounting Information

1. Owners

Owners are the people who provide capital for the business. They need
information about the financial performance and position of the
business. For this reason, they use accounting information to look into
the financial affairs of the business.
2. Management: Managers and executives within an organization use
accounting information to make strategic decisions, plan budgets,
monitor performance, and assess the financial health of the company.

3. Employees: Employees at various levels may use accounting

information to understand their compensation, incentives, and
performance-related matters.

4. Individuals

Individuals make use of accounting information in the day-to-day affairs

of managing their cash and bank balances, making investments, or
deciding on whether to buy or lease a car or home.

External Users:

1. Investors: Individuals or institutions who provide capital to a company,

such as shareholders, potential investors, and analysts, use accounting
information to evaluate the financial performance and prospects of a
business before making investment decisions.

2. Creditors: Banks, financial institutions, and suppliers use accounting

information to assess the creditworthiness of a company and determine
its ability to repay loans or fulfill financial obligations.

3. Government Authorities: Regulatory bodies, tax authorities, and

governmental agencies rely on accounting information to ensure
compliance with laws and regulations, assess tax liabilities, and gather
statistical data for economic analysis.

4. Customers and Suppliers: Customers may analyze a company's

financial statements to assess its stability and ability to deliver products
or services. Suppliers may evaluate a company's financial health to
determine credit terms or negotiate contracts.

5. Competitors: Competitors may analyze financial statements to gain

insight into a company's performance, profitability, and overall market
position.

6. General Public: Individuals, advocacy groups, and the public at large

may have an interest in a company's financial information for reasons
such as transparency, corporate social responsibility, or public
accountability.

Different with bookkeeping and accounting

Bookkeeping refers to the systematic recording, organizing, and storing

of financial transactions and information. It involves maintaining
accurate and detailed records of all financial activities, such as sales,
purchases, receipts, and payments. Bookkeeping tasks include recording
transactions in journals, posting them to ledgers, reconciling accounts,
and preparing financial statements like the balance sheet and income
statement. Bookkeepers are responsible for ensuring the accuracy and
integrity of financial data.
Accounting, on the other hand, encompasses a broader set of activities
that involve analyzing, interpreting, and summarizing financial data to
provide meaningful information for decision-making. It goes beyond
recording transactions and focuses on the interpretation and analysis of
financial information. Accounting tasks involve preparing financial
statements, analyzing financial performance, identifying trends,
calculating financial ratios, and providing financial reports to
stakeholders such as business owners, investors, and regulatory
authorities.

In summary, bookkeeping is primarily concerned with the accurate

recording and maintenance of financial data, while accounting involves
the interpretation, analysis, and reporting of that data to help
stakeholders make informed decisions. Bookkeeping provides the
foundation for accounting by producing the necessary data for analysis
and reporting.

Objectives of accounting

1. Recording and summarizing financial transactions: Accounting aims

to identify, measure, record, and classify financial transactions and
events in a systematic and organized manner. This process involves
analyzing and interpreting source documents such as invoices, receipts,
and bank statements.
2. Reporting financial information: Accounting produces financial
statements, including the balance sheet, income statement, and cash
flow statement, which provide a snapshot of the financial position,
performance, and cash flows of an organization. These statements help
stakeholders, such as investors, creditors, employees, and government
agencies, to make informed decisions.

3. Facilitating decision-making: By providing relevant and timely financial

information, accounting assists business owners, managers, and other
stakeholders in making informed decisions. Financial statements and
reports help evaluate profitability, assess the financial health of a
company, measure performance, and identify areas for improvement.

4. Ensuring compliance: Accounting helps ensure compliance with legal

and regulatory requirements. It involves adhering to accounting
principles, standards, and guidelines, such as Generally Accepted
Accounting Principles (GAAP) or International Financial Reporting
Standards (IFRS), as well as tax laws and regulations.

5. Facilitating financial analysis: Accounting data enables financial

analysis, which involves interpreting and evaluating financial information
to assess the financial performance, liquidity, solvency, and overall
health of an organization. Financial ratios, trend analysis, and other
analytical tools are used to evaluate the financial position and
performance of a business.
6. Providing information for stakeholders: Accounting provides
stakeholders, such as shareholders, lenders, suppliers, employees, and
government agencies, with relevant financial information. This
information helps stakeholders assess the financial viability,
creditworthiness, and overall stability of a business.

Overall, the objective of accounting is to provide accurate, reliable, and

relevant financial information that facilitates decision-making, enhances
transparency, supports compliance, and enables stakeholders to assess
the financial position and performance of a business entity.