According to the American Institute of Certified Public Accountants (AICPA):

And then, we have another definition – one which has been in use for a long time already – by the American Accounting Association (AAA): Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.

Both of the above definitions and the very nature of accounting suggest its basic purpose – to provide information needed by users in making economic decisions.

DEFINITION OF KEY TERMS

1. Accounting: Accounting may be defined as the process of identifying, measuring, recording and communicating financial information in order to permit users to make informed decisions.
2. Accounting equation: This is a mathematical description of the relationship between assets, liabilities and capital.
3. Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
4. Assets: Items of value to an organization.
5. Liabilities: Obligations by the organization to other parties.
6. Capital: Resources put into the business by its owners

Phases of the Accounting Process

From the above definition, we can clearly see that accounting is a process that can be divided into four phases;

1. Recording phase: involves the routine and mechanical process of writing business transactions and events in the books of accounts – also called books of original entry or simply journals – in a chronological order in accordance with the entity’s and other established accounting rules and procedures.
2. Classifying phase: involves sorting and grouping of similar transactions into their respective classes by posting them into a ledger. A ledger is a group of accounts of a similar nature. An account is the basic record of accounting which measures increases or decreases in a particular asset, liability, income or expense account.
3. Summarizing phase: this involves the preparation of financial statements or reports. It is usually done periodically e.g. monthly, annually etc
4. Interpretation: this refers to the analysis of the accounting information. It involves communication of financial information to help users in making economic decisions. This is the reason why accounting is called the language of business.

Branches of Accounting

Accounting, in all its broadness, can be sub-divided into areas of specialization;

1. Financial accounting; concerns itself with the collection and processing of accounting data and reporting to interested parties inside and outside the firm.
2. Tax accounting; deals with the determination of the firm’s tax liability which could be, Value added tax (VAT), customs duty, Pay as you earn (PAYE), corporation tax etc.
3. Cost accounting; helps establish costs relating to the production of a good or service and allocating it to the various factors that contributed to the cost of production.
4. Managerial accounting; deals with the generation of accounting information to be used categorically by the firm’s internal management in their day-to-day decision making.
5. Auditing; concerns itself with the vouching and verification of transactions from the financial accounting to determine that they are a true representation of the business’ activity i.e. the true and fair view of the company’s state of affairs.

The general purpose of accounting can therefore be summarized into five purposes;

1. Helps in decision making
2. Ascertain the value of the business
3. Know the profit and or loss position
4. Ascertain the assets and liabilities of the firm
5. Know the cash and wealth of the business