Define Accounting

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Previous lesson: Basic Accounting Concepts 
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One of the best things one can do when starting to study a subject is to define the subject itself as well as its key words. By doing so one starts to get orientated - one begins to learn what the subject is all about, what its purpose is, what it deals with.

Let's Define Accounting

Okay, so let's define accounting:

The information that is collected and recorded is primarily numerical.

This information is then presented in specific formats to various people to help them make business decisions. 

So accounting deals with recording information about a business, which is mainly numerical and helps different people make decisions relating to that business.

The accounting system is used to maintain records for all types of businesses, from single-person businesses to large multinational corporations.

To Account for Something

What Do Accountants and Bookkeepers Do?

An accountant or bookkeeper collects documentation and records this information, categorizes it (i.e. organizes the different bits of information under certain categories), and presents it in specific formats.

Bookkeepers are usually involved more in data collection and entry.

Accountants can fulfill this role too, but more often these days are involved in preparing and presenting financial statements (see explanation further below), and fulfilling an advisory or consulting role.

Accountants have even become business strategists, closely involved in guiding the planning and operations of a business.

Financial Statements

Accounting information is finally presented in the form of financial statements. 

Financial statements are the key reports of a business. 

Financial statements generally show the financial position of a business, its financial performance and its cash flow management.

Financial statements are generally prepared on an annual basis and specifically for external parties. They must be prepared in accordance with generally accepted accounting principles (in the US) or International Financial Reporting Standards (outside the US).

Financial Accounting vs Management Accounting

You may have heard of the terms financial accounting and management accounting.

Financial accounting is the record-keeping leading to the preparation of annual financial statements (as described above).

Management accounting also involves record-keeping and preparation of reports, showing things like the financial position and performance of the business, but these reports are intended just for internal personnel - executives and managers - and cover a shorter time period (like a month or quarter).

Management accounting often includes budgeting and planning, whereas financial accounting simply provides historical reports.

On this website we'll be dealing mostly with financial accounting.

Test Yourself!

Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.

Difficulty Rating:
Beginner

Quiz length: 
3 questions

Time limit:
5 minutes

Important: The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.

Good luck!

This Form cannot be submitted until the missing fields (labelled below in red) have been filled in
Define Accounting Mini Quiz:
Please note that all fields followed by an asterisk must be filled in.
1. Accounting is a system of ______________.*
a) plusses and minuses. b) reports for managers. c) computerized applications. d) recording information about a business. e) None of the above.
2. Accounting information is presented in specific formats to various people _________________. *
a) to help them correct their accounts. b) to give them something to manage. c) to help them make business decisions. d) to help them find a better accounting system. e) None of the above.
3. Financial accounting:*
a) is different to management accounting. b) provides historical reports. c) is the record-keeping leading to the preparation of annual financial statements. d) None of the above. e) All of the above.
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Okay, so that's it for our first lesson.

I hope now you can define accounting, accountant and other key terms and understand a bit more about what we're dealing with here.

We'll continue to define more key accounting terms as we move along.

Now it's time to move on to the next lesson, where we'll go over a simple but absolutely crucial equation.

This is not just the single most important equation in the subject, but actually the foundation on which everything in accounting rests.

This is the famous, or infamous, basic accounting equation.

Return from Define Accounting to Basic Concepts 

Return from Define Accounting to the Home Page 

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Previous lesson: Basic Accounting Concepts 
Next lesson: Basic Accounting Equation

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