Accounting refers to the systematic process of recording, analyzing, summarizing and reporting financial transactions of businesses or individuals. It is a method of tracking the income, expenses, assets and liabilities which helps in understanding the economics and financial health of an entity.
In very simple terms, accounting is like keeping a detailed diary of all the money that comes in and goes out in a business. A track record of every sale, purchase, payment and receipt is maintained. This detailed record helps in understanding how well the business is doing financially and how much profit it is making and how much debt it has incurred.
Usage in Economics
Accounting forms the fundamental basis of both microeconomics and macroeconomics. It is essential in a business for financial planning, analysis and decision making. In macroeconomics, accounting principles are used to compile and understand the economic data such as Gross Domestic Product (GDP). National Income and Government Budgets.
For example, a business uses accounting to keep track of its sales and expenses which help in calculating the profits at the end of the year. Similarly, the Government uses the principles of accounting to track public spending, tax collections and overall economic activities which forms the basis of the fiscal policy.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy