Definition of Accounting by the American Institute of Certified Public Accountants

The American Institute of Certified Public Accountants (AICPA) defines accounting as the process of identifying, measuring, recording, and communicating financial information about economic entities. Let's break down this definition to understand it in detail.

1. Identifying Financial Information:
Accounting involves identifying relevant financial information related to an economic entity. This includes gathering data about the entity's financial transactions, assets, liabilities, and equity.

2. Measuring Financial Information:
Once the financial information is identified, accounting focuses on measuring it in monetary terms. This process involves assigning a value to each item, such as recording the cost of inventory or determining the fair value of an investment.

3. Recording Financial Information:
Accounting requires the systematic recording of financial transactions in an organized manner. This involves creating and maintaining various financial records, such as journals, ledgers, and financial statements.

4. Communicating Financial Information:
Accounting aims to provide meaningful financial information to both internal and external users. Internal users, such as management, use this information for decision-making and evaluating performance. External users, including investors, creditors, and regulatory authorities, rely on financial statements to assess the financial health and performance of the entity.

Key Takeaways:
- Accounting is the process of identifying, measuring, recording, and communicating financial information.
- It involves identifying relevant financial data about economic entities.
- Financial information is measured in monetary terms.
- The recorded financial transactions are organized and stored in various financial records.
- The communicated financial information is used by both internal and external users for decision-making, evaluation, and assessment purposes.

In summary, accounting is a comprehensive process that encompasses the identification, measurement, recording, and communication of financial information. It plays a vital role in facilitating informed decision-making, assessing financial performance, and ensuring transparency in economic entities.