Accounting – A Practical Definition

What is accounting?

A simple definition is the recording of financial or money transactions. Not all transactions need to be recorded. Mostly, only business transactions are recorded, personal transactions are rarely recorded by individuals.

For example, you purchase a book for $10. You give the book seller $10; you receive the book & a receipt for $10. More often than not you throw the receipt away; you only want to read the book. The book seller however is operating a business so the transaction will be recorded.

The book seller will record the $10 as a cash sale and at the end of the day will total all of the book cash sales. That is easy, count the money in the till less the float amount at the start of the day and you have the total sales for the day. The book seller now has a problem, how many books were sold, what books were sold and was there a profit for the day?

Does it matter? It does if the book seller wishes to continue the business. This is where the accounting system or process begins to be a little more complicated.

The book seller now has to figure out a few things. How many books were sold is relatively easy, 45 transactions for the day so 45 books sold today. All at $10, unlikely, so the book seller needs an accounting system to record or show this information. This accounting system should show what books were sold, at what price and how many were sold.

The book seller needs this information because tomorrow there will be more sales. If there were 10 books titled “Book 1” today and four were sold then tomorrow there will only be six on the shelf. If four more are sold tomorrow, there will be two left for the day after tomorrow. If customers come into the book shop to buy “Book 1” and it is not available they will go somewhere else to get it.

It may take a week to receive more books after an order is made.

So the accounting system must show the book seller when more books need to be ordered not just how many were sold and at what price. In the example “Book 1” the book seller will need more books arriving tomorrow or early the day after so no book sale is lost. The new book order would have needed to be made a week ago for there to be no loss of book sales.

How much did the book seller pay for the books? That information also needs to be available to show whether a profit is being made. The simple transaction of one $10 sale is not so simple for the book seller.

Accounting is far more than the simple recording of a financial transaction. Accounting needs to be able to provide more information than the financial amount of the transaction alone.

A better definition would be accounting is the process of recording all aspects of the money transaction from a financial, physical and non-financial informational point.

Mind you not all transactions are completely money so even the better definition is not complete when it comes to a definition of accounting. Accounting involves so many different areas of business that any definition given is always going to be open to debate, especially amongst accountants.

Source by Michael Russell

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