What Is Accounting?

Accounting comes from the word account which means to report. The purposes of accounting is to inform and to report how well an organisation is doing to the users of accounting information, such as shareholders, managers, employees, government agencies to just name a few users.
The American Accounting Association (1966) has one of the best definitions of accounting which it defines as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.”
The definition above highlights important points about accounting, including:

• Accounting involves processing data relating to business events or transactions and grouping this data to ensure meaning can be gleaned from the financial data.
• Accounting also involves communicating information to users so financial information is used to underpin their judgments and decisions such investing decisions, credit decisions or trading decisions.

History of Accounting

An Italian by the name Luca Pacioli is considered to be the father of accounting and bookkeeping as we know it today. In the fifteenth century Luca Pacioli is considered to have coined the origins of double entry accounting.
The double entry system has become the cornerstone of all accounting and bookkeeping as it underpins the recording keeping of business transactions which eventually lead to the preparation of financial statements such as the profit and loss account and balance sheet. The double entry system argues that every business transaction has a two-fold effect, that is, every transaction leads to both a debit and a credit. The double entry system is also known as the duality concept.

Why did accounting develop?

Accounting developed as a consequence of a plethora of events. The events below are some that played a role in the development of accounting;

The fundamentals of double entry emerged as a response to accounting for trading in medieval times. Accounting developed in response to the development of trade and commerce which meant that businesses had to record business events or transactions so that the businesses had a measure of whether they are doing well.
The separation or divorce of ownership from the day to day management of organisations meant that business owners or shareholders wanted to know how the managers are discharging their fiduciary duties and their stewardship roles. Accounting is therefore the medium through which the managers use to report or to account to the shareholders or owners how the managers are discharging the day to day management of organisation on their behalf.
As organisations became complicated they needed to make decisions that were underpinned by quality information and accounting allows business stakeholders such as creditors, both current investors and potential investors to make judgments about the businesses they deal with or they invest in. Creditors would want to have assurances that the business is liquid and solvent. Through use of information from a business’ balance sheet creditors should be able to make judgments about whether the business is credit-worthy. Investors and potential investors will look at the profits and losses, the balance sheet and the cash flow statement to ascertain if the business is profitable, whether the business is financially durable and if the business is generating enough cash flow to reward them for the risk of in investing in the business