Accounting is defined as
the process of identifying, measuring, recording and communicating the economic events of an organisation to interested users.
This chapter‑wise guide is based on NCERT “Introduction to Accounting” and explains economic events, the accounting process, types of organisations and users of accounting information in simple exam‑oriented language.
This is the second unit of Chapter One “Introduction to Accounting” of Class 11 CBSE, focusing on the meaning of accounting through economic events, process and users. To familiarise yourself with Unit I (Meaning and Nature of Accounting), read this first: https://growinjob.com/meaning-and-nature-of-accounting/
Key Components of the Definition
In Class 11, the nature of accounting is explained through four key components: economic events, the accounting process (identification, measurement, recording, communication), the organisation and the interested users of information. Understanding these four parts helps you write full‑mark definitions and answer MCQs correctly in your exams.
Economic Events
An economic event is any happening that affects the business and can be measured in money. Only such monetary events are recorded in the books, while non‑monetary events, however important, are excluded from accounting.
Economic event: A happening that has consequences for the business and can be expressed in terms of money such as rupees and paise.
Example: Buying and putting a machine into use is one economic event made up of several transactions – purchase price, transport, site preparation, installation and trial runs.
Types of economic events
Economic events are usually divided into external and internal events.
- External events (between the entity and outsiders):
- Sale of goods or services to customers.
- Purchase of materials from suppliers.
- Payment of rent to landlord.
- Receiving commission or interest from outsiders.
- Internal events (within the organisation only):
- Issue of raw material from stores to production department.
- Allocation or payment of wages between departments.
- Depreciation charged on machinery used in the factory.
Only economic (monetary) events related to the business entity are identified for accounting; personal or purely non‑financial events are ignored.
Identification, Measurement, Recording and Communication
Accounting is defined as a process that begins with identification of transactions and ends with communication of information through reports and financial statements. The four main steps are identification, measurement, recording and communication.
1. Identification
Identification means deciding which events to record.
- Only events of financial character related to the business are selected for recording.
- Non‑monetary events such as change in company policies, appointment of a managing director or value of human resources are not recorded because they cannot be expressed reliably in monetary terms.
- Monetary events like sales, purchases, expenses and salary payments (whether cash or credit) are identified as accounting transactions.
2. Measurement
Measurement means quantifying identified transactions in terms of money.
- Every transaction is measured in monetary units, usually rupees and paise in India.
- Events that cannot be expressed in money, such as signing a contract without immediate financial effect or changes in staff morale, are excluded from financial accounts.
3. Recording
Recording is entering measured transactions in the books of account.
- Transactions are recorded in chronological order (date‑wise) and in monetary terms in journals, ledgers and other primary books.
- Systematic recording ensures that information can later be summarised and used for analysis, reporting and decision‑making.
4. Communication
Communication is the last step of the accounting process.
- Recorded and processed data are converted into useful reports such as financial statements, cash flow statements and internal management reports.
- These reports are supplied to internal and external users to help them assess performance, financial position, and to plan and control future activities.
- Reports may be prepared daily, weekly, monthly, quarterly or yearly, depending on user requirements, and their effectiveness depends on how clearly and timely information is presented.
Organisation
The term organisation refers to any business enterprise for which separate accounting records are kept.
- It can be a profit‑seeking business or a not‑for‑profit organisation such as a school, club or hospital.
- Examples include sole proprietorships, partnership firms, cooperative societies, companies, local authorities, municipal corporations and other associations of persons.
Accounting always relates to a specifically identifiable business entity, and its records are kept separate from the personal affairs of owners (business entity concept).
Interested Users of Accounting Information
Accounting is often called the language of business because it communicates financial information to various users who need it for decision‑making. These users are broadly classified into internal users and external users.
Internal users
Internal users are people inside the organisation who require accounting information for planning, controlling and evaluating operations.
- Owners who are actively involved in business.
- Chief Executive (CEO) and senior management.
- Financial Officer (CFO) and accounts department.
- Vice Presidents and functional heads.
- Business unit managers, plant managers, store managers and line supervisors.
They use accounting information to set targets, prepare budgets, control costs and improve profitability.
External users
External users do not have direct access to the books and therefore depend on published financial statements and reports.
- Present and potential investors (shareholders) who analyse profitability and risk before investing or continuing their investment.
- Creditors and lenders such as banks, financial institutions and debenture‑holders who are mainly interested in liquidity and creditworthiness to ensure timely repayment.
- Government and tax authorities who use accounting information to determine income tax, GST/VAT, customs and excise duties.
- Regulatory agencies like Registrar of Companies (ROC), SEBI and Department of Company Affairs that monitor compliance with laws such as Companies Act 2013 and SEBI guidelines.
- Employees, labour unions, trade associations and sometimes customers and the general public, who look at stability, growth, wages, bonuses and social responsibility.
Why Different Users Need Accounting Information (Quick Revision Table)
A simple exam trick is to remember: owners – profit, managers – planning, lenders – safety, investors – risk and return, government – tax and regulation, employees – wages and security.
Exam Tips for Class 11 CBSE (Chapter 1)
- Learn the exact definition of accounting: “process of identifying, measuring, recording and communicating economic events of an organisation to interested users.”
- Practise distinguishing economic vs non‑economic events and internal vs external events, as these are favourite MCQs and short‑answer questions.
- Always mention all four steps – identification, measurement, recording, communication – when writing about the accounting process.
- Write at least two examples each of internal and external users whenever a question asks “who are the users of accounting information?”.
- Solve previous year and important questions on this chapter from your reference books or online practice sets to strengthen conceptual clarity.
Frequently Asked Questions on Meaning of Accounting
What is an economic event in Class 11 Accountancy?
An economic event is any happening that affects the financial position of a business and can be measured in monetary terms, such as purchase of machinery or payment of salary.
Which events are not recorded in accounting?
Events that cannot be expressed in money, like changes in management policy, disputes among employees or the skill level of staff, are not recorded in financial accounts.
What are the four main steps of the accounting process?
The four steps are identification of economic events, measurement in monetary terms, recording in books of account and communication through reports and financial statements.
Why is accounting called the language of business?
Accounting is called the language of business because it communicates financial information of an organisation to various internal and external users for decision‑making.
Who are the main external users of accounting information?
Key external users are investors, creditors, banks, government and tax authorities, regulatory bodies like ROC and SEBI, employees’ unions and sometimes customers and the public.
Test Your Understanding – Meaning of Accounting
Attempt the following MCQ quiz to test your understanding of the meaning of accounting for Class 11 CBSE.
