What is Accounting ? Meaning and Basic Concept

Accounting is the language of the business. We need language to communicate in the same way a business need language and that language is known as Accounting.

In all activities whether business or non-business which require money and other economic resources to operate, accounting is required. In simple words wherever money is involved, accounting is necessary for the smooth functioning of a business or any other organization. Accounting is the language of the business. We need language to communicate in the same way a business need language and that language is known as Accounting. 


Traditional Definition
" Accounting is an art of recording, classifying and summarizing in a signified manner and in terms of money, transaction and events which are, in part at least of financial character, and interpreting the result thereof." [American Institute of Certified Public Accountants (AICPA) (1941)]

Modern Definition

"Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information." [American Accounting Association (AAA) (1966)]
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  1. Identifying: Accounting identifies transactions and events of a specific entity. A transaction is an exchange where each participant receives or sacrifices value. Example- Purchase of Raw Material, Sale of Goods etc. An event is a happening of consequence to an entity, for example, use of raw material for production. Basically, accounting helps in identifying the nature of transactions. 
  2.  Measuring: Accounting measures the identified transactions in terms of a common measurement unit, that is a currency of a particular country like Rupee, Dollar etc.
  3. Recording: It is concerned with the recording of identified and measured transactions in an orderly manner, soon after their occurrence in the proper books of account.  
  4. Classifying: It is concerned with the classification of the recorded transaction so as to group the transactions of similar type at one place. This function is performed by maintaining the ledger in which different accounts are opened to which related transactions are brought to one place by posting. For example, all purchase of goods made for cash or on credit on different dates is brought to purchase account. 
  5. Summarizing: It is concerned with the summarization of the classified transactions in a manner useful to the users. This function involves the preparation of financial statements such as Income Statement, Balance Sheet, Cash Flow Statement, Statement of changes in financial position and so on.  
  6. Analyzing: It is concerned with the establishment of a relationship between the various items or groups from income statements or balance sheet. Its purpose is to identify the financial strength and weakness of the enterprise. It provides the basis for interpretation.  
  7. Interpreting: After analyzing an accountant should interpret the statement in a manner useful to the users, so as to enable the users to make a reasoned decision out of the alternative course of action. The accountant should explain not only what has happened but also 1. Why is it happened? and 2. What is likely to happen under specified conditions. 
  8. Communicating: It is concerned with the transmission of summarized, analyzed and interpreted information to the users to enable them to make reasoned decisions. 
Accounting performs a basic function of a language, that is to serve as a means of communication to the organization. Various activities under accounting are IDENTIFYING, MEASURING, RECORDING, CLASSIFYING, SUMMARIZING, ANALYZING, INTERPRETING, and COMMUNICATION.


  1. Very Interesting Post. Accounting is the estimation, preparing, and correspondence of money related data about financial entities for using balance sheet. Such a really wonderful explanation for accounting. Thank you so much for describing the useful topic. So keep sharing this amazing topics. I would like to share with my friends. For more information visit here Douglas Knight New Canaan


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