What is basic accounting?

According to American Institute of Certified Public Accountants (AICPA), 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 financial character, and interpreting the results thereof.”

Basically, accounting is the process of identifying, measuring and communicating economic information so a user of the information may make informed economic judgments and decisions based on it.

From the definition above, there are three important activities in the accounting process, namely identifying, measuring and communicating.

Identifying

This accounting process is the recognition or nonrecognition of business activities as “accountable” events. An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. Accounting event is an economic activity. It involves measurement of economic resources and economic obligations. In other words, only economic activities are emphasized and recognized in financial accounting. Sociological and psychological matters are not yet in the range of today’s accounting practice.

Economic activities of an enterprise are referred to as transactions which may be classified as external and internal. External transactions or exchange transactions are those economic events involving one enterprise and another enterprise. Purchase of merchandise or acquisition of equipment from a supplier, sale of merchandise to customer, borrowing money from a bank, payment of salaries to employees, payment of taxes to government are examples of external transactions.

Internal transactions are economic events involving the enterprise only. These are the economic events that take place entirely within the enterprise. Production of goods available for sale to customers and casualty loss are example of internal transactions. Casualty is any sudden and anticipated loss from fire, earthquake an other events ordinarily termed as an act of God.

Measuring

This accounting process is the assigning of dollar amounts or functional currency of the entity to the accountable economic transactions and events. To be comprehensible and useful, accounting information must be expressed in terms of a common financial denominator. Based on the economic substance of the underlying circumstances relevant to an entity, the functional currency must be determined. It is the currency that mainly influences the normal operations of the Company.

Communicating

Communicating is the process of preparing and distributing accounting reports to potential users of accounting information. Investors, owners, managers, creditors, government regulatory bodies and other interested parties are the potential users of accounting information. These users read and analyze these reports to obtain information that may be helpful to them. An owner may use information to know the profitability of his business or a creditor may analyze the liquidity or the ability to pay of his debtors.

Communication process entails recording, classifying and summarizing economic business transactions.

Recording or journalizing is the process of systematically maintaining a record of all economic business transactions after they have been identified and measured.

Classifying is the sorting or grouping of similar and interrelated economic transactions into their respective classes. For instance, all transactions involving the sale of merchandise can be grouped into one total sales figure and all transactions involving cash can be grouped to report a single net cash figure.

This is accomplished by posting to the ledger. The ledger is a group of “accounts” which are systematically categorized into asset accounts, liability account, capital accounts, revenue accounts and expense accounts.

Summarizing is the preparation of financial statements which include the balance sheet, income statement, statement in changes in equity and statement of cash flows.

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