What is Accounting? (Easy Definition Explained by a CPA)

According to the Merriam Webster dictionary, accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.

If you want to watch a video that explains what accounting is in a quick summary, check this video out (otherwise read on):

Let’s break this definition down so we can understand it.

When people started trading, there needed to be a way to record information that happens in a business (kind of like a journal) so that you could know how much tax to pay, and also find out if you were actually making money.

So there needed to be a system to record this business information and that system would be called the accounting system.

The accounting system is set up in a way so that you can record the things that happen in your business and you have a record of it.

Let’s say someone wants a refund. If you didn’t keep records of your sales, you won’t know if that person was entitled to one or not. Let’s say you want a refund for something you purchased, without records, you may forget where you purchased it from, and without a record, you would have no proof of your purchase. An accounting system helps keeps records in an organised and systematic way.

Think of it as a lump of clothing. Your accounting system is like your closet and instead of organising your clothes, you organise your financial data so you can then work with it to get information you need, check it and also show reports.

So that’s what accounting is in a nutshell. It’s a way to record your money related data in a way that you can access and can give you information quickly and easily.

Next: Double Entry Bookkeeping Explained (in Simple English)

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