Accounting is an art of recording, classifying and summarizing of financial transactions in terms of money and interpretation of financial data to get the results thereof. We can understand the meaning of accounting in better way as under:-
a) With the help of accounting system we can record the business transactions in proper manner. Method of recording the transactions depends on the size of business firm. For example for a small businessman a simple day book is sufficient for recording all day to day transactions but for a business firm having large transactions, different type of day books are to be maintained like purchase day book, sales day book, cash book, bank book, journal etc.
b) The business transactions are recorded in term of money only. For Example, if we have some data available with us like two office buildings, Cash balance Rs.50000/- 5 air conditioners, 10 tables, 2 cars, 3 computers, 500 kg trade-able stock. We can not record the above transactions unless the proper value of these items is given separately. In another example, suppose the owner of a firm is not well and it is true that his health can affect the business activities but no one can record this loss because it can not be determined in term of money. Thus, the accounting system can give the proper information if all business transactions are recoded in term of money only.
c) Classifying is a process of grouping of transactions or entries of one nature at one place. For example cash purchase is recorded in cash book and credit purchase is recorded in purchase book. But, finally both type of purchases are posted at one place. This is called classification of transactions. This is done by opening different accounts as per the nature of transaction in ledger book.
d) After the recording and classification of business transactions, the totals and balances of the different ledgers are done. This is called summarization of accounts. The balance sheet, trading and profit & loss account are prepared with the help of summarized ledgers which help the management and other interested parties to understand activities of the business firm. For example if taxi is hired for business purpose. After knowing the actual amount spent for taxi, the management can take decision whether if will beneficial for firm to continue with the hired taxi or to purchase the new car. It is possible only if we interpret the summarized data.
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