What is Accounting?

What is Accounting?

Accounting is the process of identifying, measuring and communicating transactions and events in a way that is understandable to users. Economic information are provided in a quantitative format to allow users understand the business operation and status.

Three key activities in Accounting

There are three (3) main activities that we can extract from the accounting definition. These are:

• Identifying
• Measuring; and
• Communicating

Identifying Process

Identifying process of accounting means the recognition or non-recognition of accountable events and transactions. Meaning, it is the first step in the accounting process. The identification of a transaction whether or not they are to be recognized or not.

For example, Mr. X deposited an  amount to ABC Company amounting to $5,000.00. In this case, the first thing to do is to identify if this is to be recognized or not. Since, it affects the company, we have to recognize it. 

On the other hand, if Mr. X promised to deposit $5,000.00 to ABC company. There are no entries to be made. Why? because Mr. X has ONLY promised and he has not made any deposit yet. So, mere verbal promise is an accountable event but not to be recognize since it has no effects in the company.

Only transactions and events are recognizable if they affect assets, liabilities and equity. In other words, the subject matter of accounting is economic activity or measurement of economic resources or economic obligations.

Measuring Process

Measuring process is the process of determining the monetary value of an economic transaction and events at which the events are to be recognized and carried in the balance sheet and income statement. To be useful, economic events must be expressed in terms of common financial denomination. Without this monetary values, financial statements  would be largely incomprehensive.

The measurement bases are historical cost, current cost, present value and net realizable value. The most common is historical cost.

Communicating Process

The communicating process is the preparation and distribution of financial reports. It is the process of preparing financial statements and distributing the reports to potential users like investors, shareholders, creditors, owners, and other interested users. 

Identifying and measuring process is of no use if the report is not communicated to users. It is the reason that Accounting is called the "language of business".

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