The Art of Accounting

What is Accounting?
Accounting is involved in the recording, analysing, classifying and interpreting of the financial affairs of a business. It is a science concerned with recording, monitoring and assessing the financial affairs of a business at any time.

History of Accounting
Accounting was developed in ancient times. The system we have today arose from that ancient development. We know that previous communities kept primitive records by drawings on rocks or caves or cutting into trees. Later on these records were put onto stone and paper which were a lot easier to use and had a longer life.

One of the first complete documentations about how to keep books of accounting was written by a professor of mathematics in Rome. This documentation described the double-entry system of accounting which was used by the Venetian merchants. It was adopted and still used around the world today.

Luca Pacioli was the man who invented double-entry accounting around 1494. This form of double-entry accounting is sometimes known as Italian accounting because it was named after the Venetian people who developed and used it hundreds of years ago. Since that time, accounting has become far more complex and sophisticated but the principle of double-entry that arose from the initial development has never changed.

What is the "Equation" in Accounting?
Accounting is what is known as an equation. This basically means that everything in accounting needs to balance. There is always a debit entry and that must be equal to a corresponding credit entry. This is  known as double entry accounting and is a very good system because it ensures that there are checks and balances and accuracy is monitored.

For example, if you are paying for a hammer with cash the 2 entries are:

  • Hammer (asset) is coming into the business and;
  • Cash is going out of the business

There is a debit entry for the hammer and a credit entry for the cash. The debit has a corresponding credit and the total of all transactions showing debits and all transactions showing credits should equal one another.

From this we get the term double-entry.

The accounting equation has 2 functions:

  1. It gives us a point of balance to ensure the calculations in our accounting system are accurate
  2. It allows our accounting system to provide us with information that we need to run our business

Accounting vs. Bookkeeping

Bookkeeping - is the tedious part of the financial affairs of a business. It involves the systematic recording of the amounts, dates and sources of each revenue and expense transaction. Bookkeeping is concerned with the systems that enable the financial information to be extracted in the transactions that generate revenue and incur expense in the business. Bookkeeping is the engine that carries out the basic "donkey work" in the financial transaction recording area.

Accounting - is the bigger picture. It is the system that keeps track of the data, including people, and records the transaction’s history, as well as taking the information obtained through the bookkeeping process and using the information to analyze the results of the business. Accounting is the system that provides the reports and information needed for management to make decisions as to the direction of the business, as well as issues such as taxation, Sales Tax etc.

Some say you should think of accounting as a giant sifter and of bookkeeping as the process of pouring the stuff into the sifter. Things get stirred around and you get the information from the sifter after it’s been stirred, in order to run the business efficiently and profitably.