What is accounting?
A simple definition is the record of financial or monetary transactions. It is not necessary to record all transactions. For the most part, only business transactions are recorded, personal transactions are rarely recorded by individuals.
For example, you buy a book for $ 10. You give the bookseller $ 10; get the book and a receipt for $ 10. Most of the time, throw away the receipt; you just want to read the book. However, the bookseller is operating a business, so the transaction will be recorded.
The bookseller will record the $ 10 as a cash sale and at the end of the day will total all cash sales for the book. That’s easy, count the money in the till minus the float amount at the beginning of the day and you have the total sales for the day. The bookseller now has a problem, how many books were sold, what books were sold, and was there a profit for the day?
Does it matter? He does this if the bookseller wishes to continue the business. This is where the accounting system or process starts to get a bit more complicated.
The bookseller now has to find out a few things. The number of books that were sold is relatively easy, 45 transactions per day, so 45 books were sold today. All at $ 10, unlikely, so the bookseller needs an accounting system to record or display this information. This accounting system should show which books were sold, at what price, and how many were sold.
The bookseller needs this information because there will be more sales tomorrow. If today there were 10 books titled “Book 1” and four were sold, tomorrow there will only be six on the shelf. If four more are sold tomorrow, two will remain the day after tomorrow. If customers enter the bookstore to buy “Book 1” and it is not available, they will go elsewhere to get it.
It may take a week to receive more books after placing an order.
Therefore, the accounting system must show the bookseller when more books need to be ordered, not just how many were sold and at what price. In the “Book 1” example, the bookseller will need more books to arrive the next day or early so that the book sale is not missed. The new order for books would have had to be made a week ago so that there were no losses in book sales.
How much did the bookseller pay for the books? That information should also be available to show whether a profit is being made. The simple transaction of a $ 10 sale is not that simple for the bookseller.
Accounting is much more than just recording a financial transaction. Accounting should be able to provide more information than the financial amount of the transaction alone.
A better definition would be that accounting is the process of recording all aspects of the monetary transaction from a financial, physical and non-financial point of information.
Note that not all transactions are completely money, so even the best definition is not complete when it comes to an accounting definition. Accounting involves so many different areas of business that any definition that is given will always be open to debate, especially among accountants.