The Definition of Accounting and It’s Origin

What is Accounting?

In easy words,  A systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting, and communicating financial information is accounting. It reveals profit or loss for a given period, the value and nature of a firm’s assets, liabilities, and owner’s equity.

The American Institute of Certified Public Accountants (AICPA) states “the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of financial character, and interpreting the results thereof.”

In INVESTOPEDIA it defines; Accounting as the systematic and comprehensive recording of financial transactions pertaining to a business, and it also refers to the process of summarizing, analyzing, and reporting these transactions to oversight agencies and tax collection entities.

Concerning different aspects of Accounting, Michael Russell said that accounting is the recording of financial or money transactions. Not all transactions need to be recorded. Mostly, only business transactions are recorded, personal transactions are rarely recorded by individuals.”

In short, accounting as information science is used to collect, classify and manipulate financial data for organizations and individuals.

The Origin of Accounting

Accounting evolved around the time societies started trading with each other. Over time, the mathematical calculation of accounting was adopted by nearly every culture.

In the 15^th century, a person name LUCA PACIOLI, an Italian mathematician and writer first, created a system of basic accounting. In A.D. 1494 he wrote a  book called “Summa de arithmetica, geometrica, proportioni et proportionalita” & this book is regarded as an important document in the accounting history of all time. For the very first time, it gives a clear view & direction of an accounting system name double-entry accounting system. The most interesting fact is this book has illustrations and diagrams drawn by Pacioli’s friend Leonardo Da Vinci.

Pacioli described the use of journals and ledgers system in that book and suggest that a merchant should not rest until the debit equal the credit which is more like total assets is equal to total liabilities (A= L+OE). He also detailed the year-end closing entries and proposed a trial balanced be used to prove a balanced ledger.

The first professional organizations for accounting were established in Scotland in 1854, starting with the Edinburgh Society of Accounting and the Glasgow Institution of Accountants and Actuaries. The organizations were each granted a royal charter at that time and the member of such organizations could call themselves “chartered accountants”.

By the time the world entered into the modern era the American institute of Accountant set up the Committee on Accounting Procedures (CPA) in the late 1930s as a self–regulatory body and this produces a number of Accounting Research Bulletins, which were in effect statements on accounting principles and process and these were extremely successful in eliminating a number of questionable accounting practices that time.

After few decades, in 1953 the Committee (CPA) on Accounting Procedures produced a standard framework of guidelines for financial accounting called the Generally Accepted Accounting Principles (GAAP).

In 1993 the Committee on Accounting Procedures was replaced by the Accounting Principles Board (APB). In turn, this was replaced in 1973 by the Financial Accounting Standards Board (FASB), which had additional powers to regulate the Generally Accepted Accounting Principles (GAAP). In 1990, this task was taken over by the Accounting Standards Board (ASB), and today it is the ASB who has the task of setting and monitoring accounting standards.

How various parties are benefited from accounting information?

There are two types of accounting information users both inside and outside of an organization. They are called (1) Internal & (2) External users.

1) Internal users or Primary users: These users are directly connected with the organizations & run them. Like managers, employees & owners. They use AI for different reasons.

• Management: For analyzing the organization’s performance, position and taking appropriate measures to improve the company’s overall growth.
• Employees: For assessing the company’s profitability and its consequence on their future remuneration; sometimes- job security.
• Owners: For analyzing the viability and profitability of their investment and determining any future course of action. Such as more investments.

2) External users or secondary users: These users indirectly affect the organization’s decisions & profit margins.

• Creditors: For determining the creditworthiness of the organization. As terms of credit are set by the creditors according to the assessment of their customer’s financial health. Creditors include suppliers as well as lenders of finance such as banks.
• Tax authorities: For determining the credibility of the tax returns filed on behalf of the company.
• Investors: For analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company.
• Suppliers: For assessing the financial position which is necessary for supply to maintain a stable source of supply in the long term.
• Regulatory Authorities: For ensuring that the company’s disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information informing their decisions.