Accounting definition

Accounting is the systematic recordation of  the financial transactions of a business. Such recordation can be split into three activities:

  • Setting up a system of record keeping
  • Tracking transactions within that system of record keeping
  • Aggregating the resulting information into a set of financial reports

These three aspects of accounting are broken down into more detail as follows:

  • Record keeping system. The system of record keeping for accounting requires the use of a standard set of accounting policies and procedures, as well as standardized forms. The procedures should incorporate controls designed to ensure that assets are used as intended. The record keeping system is commonly built around a commercially available, off-the-shelf accounting software package. The overall system will likely need to be designed around the software, to ensure that all features of the software are fully employed.
  • Transaction tracking. A separate procedure is needed to collect information about each type of business transaction. For example, separate systems are needed to process customer orders, bill customers, and collect cash from customers. Transaction tracking occupies the bulk of the time of the accountant.
  • Financial reporting. Several accounting frameworks, most notably GAAP and IFRS, mandate a specific manner in which business transactions must be treated in the accounting records and aggregated into the financial statements. The result is an income statement, balance sheet, statement of cash flows, and supporting disclosures that describe the results of a reporting period and the financial position of the reporting entity at the end of that period.

In short, the meaning of accounting covers a broad range of activities, but can be aggregated into a data collection system, the ongoing collection of data into that system, and the reporting of information from that system.

The meaning of accounting can be erroneously expanded to include internal and external auditing. Internal auditing involves the testing of systems to see if they operate as intended, and so falls outside of the traditional definition of accounting. External auditing involves the examination of accounting records to see if the auditor can attest to the fairness of the information presented in the financial statements; again, this task falls outside of the traditional definition of accounting.