Accounting is the systematic process of identifying, recording, measuring, classifying, verifying, summarising, interpreting, and communicating financial information to its users. The American Accounting Association defines it as the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information.
Key branches of accounting: - Financial Accounting — records transactions and prepares financial statements for external users (investors, creditors, regulators) - Cost Accounting — determines the cost of products/services for internal decision-making - Management Accounting — provides information to managers for planning, controlling, and decision-making
Objectives of accounting include: systematic recording of transactions, determining profit or loss for a given period, ascertaining the financial position via Balance Sheet, and providing information for decision-making.
Users of accounting information fall into two categories: internal users (management, employees) and external users (investors, creditors, government, tax authorities).
Exam tip: ICAI frequently asks theoretical questions on the definition, objectives, and functions of accounting. Be clear on the distinction between bookkeeping (recording) and accounting (recording + analysing + interpreting).