What is Accounting

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When we hear the word accounting, what comes to mind is the so-called “debit” and “credit” which means “to balance” to a simple layman and also flashes of computer images, stacks of documents, a calculator, pen and paper worksheet.  Accounting is not a modern-day service activity but old history dating back to 8500 B. C. in Mesopotamia (modern day Iraq) when archaeologists have established certain clay tokens in form of cones, spheres, disks, and pellets.  Evidence of accounting is present from Middle Ages up to the Industrial Revolution.

There are several definitions about accounting.  Actually, Accounting is a service activity with the goal to provide quantitative financial information about economic entities.  Business owners, in order to make informed and sound economic decisions of a business entity, rely on this quantified financial information.

Accounting has gained many definitions including:

“Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

In the above definition, a simple layman can understand that accounting is an art that involve the following process in the correct order as they are enumerated:

  • Recording
  • Classifying
  • Summarizing
  • Interpreting

But what to record, classify, summarize and interpret?

These are the transactions and events which are financial in nature.

How to record the transactions and events in accounting?

This consists of recording the transactions in a significant manner and in terms of money.

It is very interesting to note that in Accounting, a financial transaction is recorded through the “Debit” or “Credit” side that include these five main accounts in accounting:

 

Account Normal Balance Side to Record Increases
Assets Debit
Liabilities Credit
Capital Credit
Expenses Debit
Income Credit

When you look at the summary above, please do not be overwhelmed, even if it looks a bit difficult because as you go on to the next topic, you will find out that Accounting is not that difficult to learn.

Accounting transaction can either affect asset accounts, or a combination of asset and liability or any account which give rise to a single debit and single credit entry.  An example of this is when you purchase items for sale and pay the full amount in cash for S$100.00.  The transaction have an effect of increasing your inventory as the products go to your store or warehouse but decrease the cash when you pay the supplier for the items purchases.  So, try to look at the table above and the resulting journal entry would be:

Debit – Inventory                      S$100.00

Credit – Cash                                                            S$100.00

Take note that both Inventory and Cash are both Asset accounts and this increases the inventory but decreases the cash but its total effect to the assets account remain the same.

Other accounting transaction results to more than one debit entry or more than one credit entry.  So in the sample transaction above, instead of fully paying $100.00 for the merchandise, payment is only made for S$50.00 and the S$50.00 balance to be payable after one month.  In this case, the entry would be

Debit – Inventory                       S$100.00

Credit – Cash                                                            S$ 50.00

Credit – Accounts Payable                                      S$ 50.00

Analysis:

The above transaction results in an increase in Inventory asset of S$100.00 but decrease the cash which is also an asset account by S$50.00. Accounts Payable which is a liability account increase (credit side). Take note that the total of account debit and total of account total credits total to S$100.00 and so they “balance”.

 

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