What is the definition of "accounting?"

American Accounting Association defines accounting as:

The process of identifying, measuring and communicating information to permit judgment and decision by users of accounts.

It is a tool for recording, reporting and evaluating, in monetary terms, the transactions, events and situations that effect an enterprise.

Accounting function consists of following five type of activities:

1. Collection and recording of data.


2. Classification of data


3. Processing of data including calculating and summarising


4. Maintenance or storage of results


5. Reporting of results

Accounting serves many purposes. It is broadly divided in three types according to the purpose served by it. These three types of accounting are:

1. Basic accounting


2. Management Accounting


3. External Accounting

Basic accounting, also called Bookkeeping, represents the earliest application of accounting. It serves the purpose of facilitating the operating activities of an enterprise involving financial transactions. For example to determine the money to be paid to suppliers, or to be collected from customers.

The information available from the basic accounting can be further analysed and presented to management of a firm to help them in their planning and controlling functions. This is the function served by management accounting.

With advent of large corporation the ownership of companies got separated from management, and a need arose for providing information on activities and performance of companies to shareholder and other stakeholders outside the company, not involved in direct operation or management of company. External accounting meets the need for this type of external accounting.