Meaning of Accounting

The American Institute of Certified Public Accountants (AICPA) defines accounting as “The art of recording, classifying and summarising, 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 defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.

Meaning of Accounting

Characteristics of Accounting Information

The validity of accounting information which enhances its understand-ability and usefulness, are based on the characteristics of Reliability, Relevance, Understand-ability Comparability.

Reliability: The Reliability of accounting information is the degree of correspondence between the information conveyed about the transactions and the information displayed. Reliable information should be free from errors and biases. It should faithfully represent what it is meant to. To ensure this, the information disclosed must be credible and verifiable by independent parties.

Relevance: To be relevant, information must be available on time. It must help in prediction and feedback and it must influence the decisions of users by confirming or correcting their past evaluations.

Understandability: Decision-makers should be able to interpret accounting information in the same sense as it is prepared and conveyed to them. A message is said to be effectively communicated when it is interpreted by the receiver in the same sense in which the sender has sent it. Accountants should present information in the most intelligible manner without sacrificing relevance and reliability.

Comparability: Users of financial reports should be able to compare various aspects of an entity over different periods and also with other entities. To be comparable, accounting reports must belong to a common period and should use a common unit of measurement and format of reporting.


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