At the end of this chapter the students should be able to:
Explain the meaning and purpose of accounting
Describe the role of accounting as a information system
Describe why accounting is considered as the language of business
Assess the impact of external environmental factors on accounting
Accounting has evolved and emerged as most other fields of human activity in response to the social and economic needs of society. Today accounting is moving away from its traditional procedural base, encompassing record keeping and related activities towards the adoption of a role which emphasizes its social importance. In this context, this introductory chapter of the course manual deals with the definition of accounting, use of accounting as an information system and the language of business, users of accounting information and the impact of external environment on accounting.
Definition of Accounting
The question what is meant by accounting has not been answered precisely. Instead there are many definitions on accounting. Some of these definitions are considered in this section to identify the purpose and functions of accounting.
The Committee on Terminology of the American Institute of Certified Public Accountants (AICPA) formulated the following definition on accounting in 1941.
Accounting is 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 a financial character, and interpreting the results thereof.
This definition of AICPA, USA has been quoted for many years. However, it defines accounting only from the point of view of what it does. Hence, it does not clearly establish the purpose of accounting.
On the other hand, the following definition provided by the American Accounting Association (AAA) in 1961 emphasizes the broader perspective of accounting. This definition focuses on accounting as an aid to decision-making.
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.
In 1970, AICPA of USA provided the following definition on accounting with reference to the concept of information. The term ‘quantitative information’ used in this definition is wider in scope than financial or economic information used in previous definitions.
Accounting is a service activity. Its function is to provide quantitative information primarily financial in nature about economic activities that is intended to be useful in making economic decisions.
Both definitions of AAA and AICPA show that accounting is considered not merely with record keeping. Instead it involves with a whole range of activities. These two definitions emphasize on using accounting information for decision making purposes. Both internal parties of an organization (e.g. managers) and outside parties (e.g. owners, creditors, government) use accounting information in making decisions that affect the organization.
Although these definitions have looked at accounting from different perspectives, they have been able to set the boundary of accounting. They have established the nature of accounting and the purpose for which it is used. Hence, based on these definitions, it can be said that accounting is primarily concerned with the provision of information to various stakeholders of an organization to be used in decision making.
Accounting as an Information System
AAA definition on accounting implies two phases: (1) identifying and measuring economic information and (2) communicating economic information to users (stakeholders of an organisation) for decision making purposes. These two phases show that accounting acts as an information system in an organisation.
The accounting process involves recoding and processing of transactions and events of an...
References: American Accounting Association (1966), A Statement of Basic Accounting Theory, AAA.
American Institute of Certified Public Accountants (AICPA) (1941), Review and Resume, Accounting Terminology Bulletin, No.1.
American Institute of Certified Public Accountants (AICPA) (1970), Basic Concepts and Accounting Principles underlying Financial Statements of Business Enterprises, Accounting Principles Board Statement No.4,
Anthony, R.N. and Reece, J.S. (1991), Accounting Principles, Richard D Irwin.
Ijiri, Y. (1975), Theory of Accounting Measurement, Research Report, No. 10, AAA.
Lal, J. (2005), Corporate Financial Reporting: Theory and Practice, second edition, Taxmann Allied Services (Pvt) Ltd, New Delhi.
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