Accounting is often called the language of business because when confronted with events of a business nature, all people in society—owners, managers, creditors, employees, attorneys, engineers, and so on—must use accounting terms and concepts to describe these events. Examples of accounting terms are net, gross, yield, valuation, accrued, deferred—the list goes on and on. So it is logical that anyone entering the business world should know enough of its language to communicate with others and to understand their communications.
As you acquire knowledge of accounting, you will gain an understanding of the way businesses operate and the reasoning involved in making business decisions. Even are not involved directly in accounting activities, you will certainly need to be sufficiently acquainted with the language in order to understand the meaning of accounting information and how it is compiled, how it can be used, and what its limitations are.
You may be surprised to find that you are already familiar with many accounting terms. Recalling your personal business activities and relating them to your study of accounting will be very helpful to you. For example, when you purchased this textbook, you exchanged cash or a promise to pay cash for the book. As you will see, this exchange is an accounting event. You are going to recognize many activities and terms as you begin your study of accounting.
DEFINITION OF ACCOUNTING
Accounting is the process of analyzing, classifying, recording, summarizing, and interpreting business transactions in financial or monetary terms. A business transaction is an event that has a direct effect on the operation of an economic unit, is expressed in terms of money, and is recorded. Examples of business transactions are buying or selling goods, renting a building, paying employees, and buying insurance.
The primary purpose of accounting is to provide the financial information needed for the efficient operation of an economic unit. The term economic unit includes not only business enterprises but also not-for-profit entities such as government bodies, churches and synagogues, clubs, and public charities. Business enterprises or organizations may be called firms or companies.
Another important purpose of accounting is to provide useful information for decision making in the business enterprise. Similar to decisions you must make in your daily life, accounting helps businesses make decisions. For example, knowing whether there is enough cash to purchase new equipment or whether the business is making a profit requires knowledge of accounting.
All business entities require some type of accounting records. Basically, an accountant is a person who keeps the financial history of the transactions of an economic unit in written or computerized form.