In practice, accounting is a systematic process of analyzing, verifying/validating, calculating, recording, classifying, summarizing, and reporting financial information of a business (or organization) in a certain form that useful for its users to make good business decision.
Formally, the Accounting Principles Board (APB) defined accounting as a system for providing “quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.” (Statement APB No.4, “Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises,” Published by AICPA.)
In addition, in case if you haven’t noticed yet, the word “accounting” is often referred to as a department in a company (or organization) that takes care and responsible for accounting affair. The department is called “Accounting Dept” but people often call it just “the accounting.”
Those whose works in the department is called “accounting staff” or “accounting people.” The person whose manage the department is called “Chief of Accounting” (HR sometimes call it “Accounting Manager” which, in my personal opinion, is not quite fit.)
A qualified person who, by education and training, got specialized in reviewing and auditing the work of accounting, is called an “Accountant.” An accountant who passed a special examination for auditing public entities and licensed by local government is called “Certified Public Accountant” (CPA.)
So, what is accounting all about?
To understand what accounting is all about, let me elaborate further by extracting the first definition above:
1. Systematic Process
First, accounting is a system. By system means there are techniques, procedures, and standards, to follow for accounting to work. For example, there are techniques, procedures, and standards, to follow when recording a transaction. There are techniques, procedures, and standards, to follow to determine the amount of an expense to be charged. Every single activity performed and every single judgment made, in within the accounting process, should respect the procedures and standards. Otherwise, the system (i.e. accounting) won’t work as expected.
Second, accounting is a process. By process means that accounting isn’t a single action. Instead, it is a series of action, step-by-step, in a chronological way.
By learning Accounting means that you’re making yourself understand and get used to the system, the process, the principles, and standard, of the accounting. By working in accounting means you work by using the system and follow through the process.
2. Analyzing, Verifying/Validating, Calculating, Recording, Classifying, Summarizing and Reporting
Accounting involves series of step-by-step process. It is started by analyzing, followed by verifying/validating, and then calculating, next is recording, summarizing, and finally reporting. Let’s elaborate a little bit more on each of the processes:
Step-1. Analyzing – Every single transaction goes to the accounting, firstly, must be analyzed whether or not the transaction is related to the business, what is the date, what accounts are going to be involved, what standard and procedures should be followed.
Step-2. Verifying/Validating – Every single transaction goes to the accounting, secondly, must be verified and validated whether the transaction is legitimate, has supporting papers, and in accordance to the actual quantity of goods in or goods out.
Step-3. Calculating – Every single transaction goes to the accounting, thirdly, must be counted, made sure all calculation has been correct and determined the proportion of the transaction that can be recognized according to the procedures and standards.
Step-4. Recording – Every single transaction goes to the accounting, fourthly, must be recorded following the procedures and standard
Step-5. Classifying – The recorded transaction then, fifthly, classified to the correct accounts following the procedures and standard.
Step-6. Summarizing – The classified transaction then, sixthly, boiled down and summarized so that each account has only one amount.
Step-7. Reporting – The summarized transaction on the account then, finally, presented in the reports (called “financial statement”) following the procedures and standard.
By learning Accounting means that you’re making yourself understand and get used to the activities on each step above, each of its procedures and standards. By working in accounting means you work on all activities on all of the steps above and apply the procedures and the standards accordingly.
3. Financial Information
Accounting focuses on financial information. A business involves and can be approach from many different aspects (i.e. financial, humans, environment, public image, legal, and etc) and Accounting focuses on the financial aspect that can be quantified (=translated into numbers) only. Any non-financial aspects and non-quantifiable events are beyond the accounting scope.
By learning Accounting means that you’re making yourself understand and get used to financial information. By working in accounting means you work on financial information.
4. Business or Organization
Accounting is about business or organization (for-profit or not-for-profit). It means that accounting can exist and used in any businesses or organizations in any forms and ownerships (solo, partnerships, corporation,) public and non-public entities, government and private sectors. Accounting works as a tool in within the organization.
While the ‘technique-procedure-and-standard’ remains the same, the use of accounting can be simple or complex depending on the character of the organization (i.e. the size/scale, the form, the business line, etc.)
By learning accounting means that you’re making yourself understand and familiar with the operation of the business and its environment. By working in accounting means you work for a business or organization; your works is much affected by the character of the business.
5. In Certain Format
By convention, accounting uses certain forms that are universal (used by accountants in any business.) Every report generated by the accounting process are formatted in a certain way.
The main report called “financial statements” (i.e. the statement of financial position or balance sheet, profit and loss statements or income statements, statement of change in equity, and the cash flow statement), for example, is always formatted in a way following the universal convention.
By learning Accounting means that you’re making yourself understand and familiar with the forms. By working in accounting means you work using the forms. Accountants master it.
6. Useful for Its Users
Accounting exists and used for one purpose; being (or intended to be) useful for its users.
Who are the users of financial information generated by accounting process?
- The management of the company or organization (internal user)
- The investors, both existing and prospected investors
- The creditors, both existing and prospected creditors (suppliers and financing provider like bankers)
- The customers, both existing and prospected customers
- The government, tax authorities and security exchange commission (in the case of public entity)
For example, an investor is able to calculate Return on Investment (ROI) by using numbers on the income statement and balance sheet generate by the accounting process. Sticking on that purpose, accounting presents the reports in such way that users can understand and use it.
By learning Accounting means that you’re making yourself understand and capable of generating useful financial reports. By working in accounting means you work to generate financial information that is useful for users.
7. Good Decisions
Accounting proceeds and generates financial information for good decision making. Unless it is used for decision-making, the financial information on the reports is useless.
Accounting presumes its users as people who has that capability. Despite users has the capability or not, accounting still presumes the report will be used for decision-making so the financial information has to be reported in the format that follows the convention, however.
By learning Accounting means that you’re making yourself understand and familiar with the way users use financial information as a basis for decision-making. By working in accounting means you work on financial information in a way that users capable of using it as a basis for making a good business decision, and to do so you’d better have enough of the know-how.
That is pretty much all about the accounting.