What is accounting?
Accounting can be defined as the process of collecting business events, recording, organising, presenting, analysing and interpreting financial records to aid users with decision-making.
Accounting is not about receiving and paying out cash to people as some novice thinks. It is a scientific process that ensures that business events, data, and information are processed and refined for the benefit of decision-makers.
The field of accounting has moved beyond the use of paper to the use of software, and now artificial intelligence is the modern way of processing financial data that helps users make decisions.
Accounting is not all about receiving and paying cash to people. In recent times, artificial intelligence has been used to post transactions and prepare financial statements.
These users are business owners, investors, regulators, and the government. Businesses are expected to keep regular financial records. In fact, the company laws in all countries point out that business owners and directors of companies are responsible for ensuring that business events are recorded regularly. Failure to do so may attract a fine from the government.
Investors are those who provide funding to a business. They need business information to enable them to make investment decisions such as to buy, sell, or hold. The government uses such information for regulatory and compliance purposes.
The six primary processes of accounting
The accounting process begins with collecting data down to analysing and interpreting the information for users. These terms are explained below:
Collecting:
Data is collected from business events. Generally, the data are sourced from daily business activities. As we know, it can be qualitative or quantitative. When a business event takes place, for example, sales of goods to a customer for N250,000 cash. This event is collected through different sources known as source documents.
Recording:
The next process is recording business transactions. In traditional accounting, there are two ways of recording these transactions. That is books of original entries and ledger accounts.
In a computerized system, digital journal entries are passed in the system and they are automatically recorded in their respective accounts in such systems.
Organising:
To ensure that the recorded transactions are in order, it is important to organise the accounts within the bookkeeping and accounting system of the entity. This is done through a chart of accounts and trial balance. From here, we know what accounts are assets, liabilities, capital, income, and expenses.
Presenting:
The next process after organising submarine accounts in a trial balance is to present the accounts recorded from source documents in a way that can be understood by users.
Generally, accounts are presented into what is generally referred to as the final account. Including a statement of profit or loss, statement of financial position, statement of cash flow, and statement of changes in equity.
Analysing:
The next step is analysing the information that is represented in those statements. To many people, accounting jobs end with presenting financial information above. But this is not true. Interpreting those statements for users of that information is also paramount. This is done using financial ratios, trend analysis, and period comparison, among others.
Interpreting:
Analysing and interpreting are similar. However, to interpret will include the analysed data from the presented financial information and storytelling. Here, the practising accountant is expected to tell a story about what the financial statements and analysed data mean.
