Meaning and Definition of Accounting

Every business, however small, carries out a stream of transactions — buying goods, selling to customers, paying rent, receiving cash from debtors. Unless these are recorded in an organised way, nobody — not the owner, not the tax authorities, not a lender — can tell whether the business is making money or losing it. Accounting is the discipline that records, classifies, summarises and interprets these transactions in terms of money, and communicates the results to the people who need them.

The American Institute of Certified Public Accountants (AICPA) defines accounting as "the art of recording, classifying and summarising 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." Four ideas sit inside this one sentence, and each is a distinct step:

1. Recording — entering every transaction, in the order it happens, in a book called the Journal.
2. Classifying — grouping transactions of the same nature together in separate accounts (all cash transactions in the Cash Account, all transactions with a particular customer in that customer's account) — this is done in the Ledger.
3. Summarising — presenting the classified data in a form useful to the reader: the Trial Balance, the Trading and Profit & Loss Account, and the Balance Sheet.
4. Interpreting — analysing the summarised results so that a user can draw conclusions about profitability, liquidity and financial position, and take decisions.

Only transactions that can be expressed in terms of money enter the accounting records — a dispute between two employees, however important to the business, is not an accounting event because it cannot be measured in rupees; a sale of goods for ₹50,000 is, because it can.

This chapter's syllabus draws on the same universal double-entry accounting principles that CBSE and every other Indian board's Accountancy syllabus is built on — the definitions, objectives and basic terms below are the common foundation every accounting course in the country starts from.