INTRODUCTION

Accounting is said to be the language of a business. A language can not be understood unless a person is vast in it. Also, to understand a business, you need to know the language and that language is accounting.


To define accounting, we will make use of the acronym CROPAI which stands for Collection, Recording, Organising, Presenting, Analysing and Interpreting.

Accounting is therefore defined as a process of collecting, recording, organising, presenting, analysing and interpreting financial information to enable users make informed economic decision.

For a better understanding, let us break down the above definition.

Accounting is a process.

In what sense? A process is like a circle. It starts from one end and return back to its starting point. That is how accounting is. Accounting starts from recording and continues to analysis and begin again with recording.

Collecting.

The accountant collects data from financial transactions. This include when a person comes to buy goods on credit or when the business purchase goods on credit. The accountant collect all this data through the help of a book keeper.

Recording.

When financial data are collected, they are recorded in a book. The data which is in monetary term passes through the source document, subsidiary books and ended in the ledger book.

Also Read: keeping financial transactions for small business.

Organising.

In recording the financial data, accountant organised them so that each data can be found easily. For example, the subsidiary books is made up of sales day book, purchases day book, return inwards day book, return outwards day book, cash book and general journal. With such organisation, it is easy for the accountant to easily locate any data on request. It also assist auditors to carryout audit trail.

Another aspect of organising is the ledger book. It is organised into three sub-books. They include: general ledger, purchases ledger and sales ledger. Folio number is also great in organising accounting data. It enable the accountant and auditors to easily identify where the dual part of a transaction can be found.

Also read: how to keep financial transactions for small business.

Presenting.

Accounting do not end with recording. The financial data recorded must be presented for users to read. This is one of the core aspect of accounting. Financial data are presented in the financial statements of an entity and in other quarterly reports provided to management.

Also Read: IAS 1 -general purpose financial statement and

20 items that must be recorded in a statement of financial position.

Analysing.

After presenting the financial statements, the accountant will analysed them using accounting ratios. Various accounting ratios abound and are good for analysing financial statements to check for stability, growth in terms of profitability and liquidity. It is the duty of accountant, financial analyst and bankers to analysed a financial statement.

Interpreting.

Financial statements are not just provided for it sake. It is provided so that accountant and other users should interprete. Today users interprete financial statement not just for ratios analysis only, but also for research purposes.

A person may research on profitability of a particular sector, say banking sector. The researcher will collect from the financial statements of various banks, collate the profit figure and analysed them using various analysis such as bar chart, pie chart, histagram, time series, correlation and so on.

Financial information are informations that has been processed by the accountant from financial data such as sale of goods for cash and payment for purchased of machine.

Financial information include profit after tax, turnover, EPS and so on.

Informed Economic Decision

The end product of accounting is to enable users make informed economic decisions. The economic decisions that users makes are majorly investment and financial decisions.

A actual investor will use the information provided by the accountant decide if he should withdraw is investment or add more fund to an investment in a particularly entity.

Management can used accounting information to take a primary decision like discontinuing an investment or to continue an operation.

Further reading: reasons why small business fail-marketing.