Let’s first discuss what Accounting is.
According to the American Institute of Certified Public Accountants (AICPA), Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of financial character and interpreting the results thereof.
Accounting is an Art. It is an Art because we use an abundance of estimates and the rules are ever changing. Some of the changes we can all agree are improvements and some…not so much. I once took a cab ride in New York and upon finding out I was a CPA, the cabbie noted that the AICPA had made no improvements in accounting, except in 1974 when they determined that financial statements could be rounded to the nearest dollar.
While I am not as cynical as my cabbie friend, it seems that as with paintings and sculptures, everyone has an opinion of the Art of Accounting.
Accountants record transactions and estimates of what has been earned, what has been expended, what is owned and what is owed. These transactions need to be correct as to account, amount and period.
Transactions are recorded in accounts. Accounts are further classified as Assets, Liabilities, Owners Equity, Revenues or Expenses.
Periodically, the transactions are summarized and the resulting product is Financial Statements. Financial Statements are comprised of the Balance Sheet (including the Statement of Owners Equity), Income Statement and Statement of Cash Flows.
The Financial Statements noted above are prepared according to a standard set of rules. The purpose of the rules is to enable the users of Financial Statements to understand them. It has often been said that Accounting is the language of Business. Without a common framework, the language of Business would easily become the tower of Babel.
Accounting is expressed in money. Money is the tally for the scorecard. It is not being asserted that your business has no need to collect any other information. Indeed analyzing labor hours and units of production are necessary. But these are not strictly speaking Accounting processes, although Accountants are well suited to collect that information as well.
Interpreting the Results
After Accountants have collected the financial information and dutifully prepared Financial Statements, you still may have some questions like, “What do they mean?” Answering those questions is also the job of an Accountant.