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Accounting Definition, Types of Accounting, and Why Accounting is Important

Sandrene is an ACCA candidate pursuing a B.C Degree in Accounting and Finance with 5 years experience in Financial Services/Accounting.

accounting-definition-types-of-accounting-and-why-accounting-is-important

What is Accounting?

Many people when asked this question will tell you that Accounting is "the language of business", and while this is absolutely true, I cant help but think that it is a little vague. You see, Accounting is more than a language. Some people say its an art, some say it's a science but i think it is both. To clarify, let's look at a definition of Accounting which is based on my years of experience being an Accounting Officer.

I found Accounting to be a system used to capture, analyze, interpret, and present the financial transactions of a business to its stakeholders. Pretty concise definition right? Let us expand it a little by looking at some of the keywords.

  • Systematic - methodical, repetitive, continuous processes or procedures
  • Capture - to Identify and record
  • Analyze - to examine thoroughly or perform calculations
  • Interpret - to make sense of, convert information into easily understood format
  • Present - to give an account, report, show, explain, or illustrate
  • Financial Transaction - an exchange of services/goods/money or an event that causes the financial position of the business to change
  • Stakeholders - any individual, group, organization that has an interest in the business

Therefore we can expand and rewrite the definition of Accounting to be a continuous process used to identify, examine, make sense of monetary exchanges or events, and report and explain them to those who have an interest in the business. And this is exactly what the accounting department in which i worked ever did. It doesn't get any more complicated, contrary to popular belief.

accounting-definition-types-of-accounting-and-why-accounting-is-important

Both Science and Art?

Now why did i say it is both a science and an art? Accounting has procedures that have to be followed which makes it a science because things have to be done a specific way or following a prescribed format. But it is also an art, because one has to exercise judgement in certain situations where guidelines offer options or are not abundantly clear.

accounting-definition-types-of-accounting-and-why-accounting-is-important

Accounting provides many benefits to include:

  1. It keeps the financial affairs of the business organized
  2. It helps to evaluate a businesses performance
  3. It provides data for budgeting and financial forecasting
  4. It ensures businesses abide by the law in terms of financial reporting
  5. It saves time and money


accounting-definition-types-of-accounting-and-why-accounting-is-important

Types of Accounting

Accounting exists in various forms and bears many arms, each part serving a unique purpose. When people think of Accounting, they mostly associate it with preparing financial statements but that is only one arm of accounting. There are five main types of accounting with some variations in between. They can be categorized as follows:

  1. Bookkeeping - the process of collecting storing financial records/documents for the business
  2. Financial Accounting - which is focused on summarizing and reporting financial transactions. This one is the most widely known and has in modern times been springing variations such as Environmental, Social, and Public accounting.
  3. Managerial Accounting - focused on analyzing the businesses financial transactions, primarily costs, in order to help managers and supervisors make informed decisions
  4. Tax Accounting - using financial information to prepare tax returns and strategize tax plans for the business
  5. Auditing - the examination of accounting records and assets to ensure compliance to the standards. There is an extension to this called Forensic Accounting which investigates financial records for fraud or prepare documents fro these records for a court proceeding.


If you are currently studying Accounting, It is crucial to understand the basic principles in order to master the system

If you want to UNDERSTAND and MASTER Accounting, check out this Youtube Channel I created just for you!

Comments

Sandrene Morris (author) from BRAMPTON, CANADA on January 07, 2021:

You’re welcome bhattuc. More will be coming soon!

Umesh Chandra Bhatt from Kharghar, Navi Mumbai, India on January 06, 2021:

Nice articles to learn about basic accounting. Thanks.