Introduction to
Accounting
By Arijit Saha
Definition by the American Institute of
Certified Public Accountants (Year 1961):
“Accounting is the art of
recording, classifying and
summarizing in a significant
manner and in terms of money,
transactions and events which
are, in part at least, of a financial
character, and interpreting the
result thereof”.
Definition by the American
Accounting Association (Year 1966):
“The process of identifying,
measuring and communicating
economic information to permit
informed judgments and
decisions by the users of
accounting”.
Luca Pacioli
Why is he recognized as father
of accounting?
"Summa de arithmetica, geometria,
proportioni et proportionalita,"
published in 1494, included a 27-page
treatise on double-entry accounting,
which is still used today.
Pacioli's work wasn't the invention of
double-entry bookkeeping itself, but
rather the first comprehensive
explanation and documentation of the
system used by Venetian merchants.
Nature of Accounting
(Contd)
1. Accounting as a Process
Accounting follows a systematic, step-by-step process that helps
record and summarize financial data. The process includes:
Identifying Transactions: Financial activities, such as a sale or
purchase, must first be identified. For example, if a company buys
new equipment, this transaction must be documented.
Measuring and Recording: Every transaction is assigned a
monetary value and recorded accurately in journals. For
instance, if a company earns Rs 10,000 from a sale, that amount is
recorded in the books.
Classifying Data: Large volumes of data need to be grouped. For
example, all expenses related to salaries might be grouped under
“Salary Expenses,” making it easier to track.
Summarizing: The detailed information needs to be summarized
in a way that is easy to understand, such as preparing monthly
financial reports.
Analyzing and Communicating: The summarized information is
then analyzed and shared with stakeholders, such as investors or
company managers, to help them make informed decisions.
Nature of Accounting
(Contd)
2. Accounting as an Art
Accounting requires both technical knowledge
and creativity. It’s not just about numbers; it
involves interpreting financial data and
presenting it in ways that are useful for
decision-making. This involves:
Creativity in Presentation: Accountants
often need to find new ways to present
complex financial data that can be easily
understood by different stakeholders.
Skillful Judgment: For example, deciding
how to categorize an expense or the method
to value inventory involves judgment and
expertise.
Nature of Accounting
(Contd)
3. Accounting as a Means, Not an End
Accounting is a tool, not the final objective. It
provides critical financial information to
users—both internal (management) and
external (investors, creditors)—so they can
make informed decisions. For instance:
Internal Users: Managers use accounting
information to plan, control, and make
decisions.
External Users: Investors, lenders, and
government agencies rely on accounting
information to assess the company’s
financial health and make
investment decisions.
Nature of Accounting
4. Accounting as an Information System
Accounting serves as a vital information system
for organizations. It collects, stores, and
communicates financial data, which can be
used by various stakeholders to make
decisions. For example:
Information Storage: Accounting systems
store detailed records of all financial
transactions, which can be accessed when
needed.
Communication: It communicates key
financial details, such as profits and losses, to
investors and other stakeholders.
The Objectives of
Accounting
Maintaining systematic
financial records
To estimate and ascertain
profits or losses
Preparing financial reports to
assess the financial position
Auditing of financial reports
To forecast future payments,
expenditures and budgets
What is Bookkeeping?
Bookkeeping is the process of
keeping track of a business’s
financial transactions. These
services include recording what
money comes into and flows from
the business, such as customer
and vendor payments. While
bookkeepers used to keep track of
this information in physical books,
much of the process is now done
on digital software.
Aspect Bookkeeping Accounting
Definition Identifying and recording Summarizing, interpreting,
financial transactions only and communicating
financial data of an
organization
Decision Making Not sufficient for decision Provides data for making
making important management
decisions
Preparation of Financial Not done in bookkeeping Involves preparation of
Statements financial statements
Analysis No analysis required Involves analysis to
generate insights for the
business
Persons Involved Bookkeeper Accountant
Determining Financial Does not show the financial Shows a clear picture of the
Position position of a business financial position
Level of Learning No high-level learning Requires high-level learning
required to understand and analyze
accounting concepts
What Is the definition of an
Accountant?
A professional who conducts accounting
activities including accounting research, audit, or
analysis of financial statements is known as an
accountant. Accountants work for accounting
companies or in the internal accounting
departments of large corporations. They are
responsible for ensuring that companies
maintain accurate records of their income and
expenditures of a company.
They may even establish their own practices that
are private. These professions require the
completion of government-approved educational
and testing standards that are overseen by
national professional associations. These
standards are designed to ensure that individuals
What is a Bookkeeper?
A Bookkeeper is responsible for recording and
maintaining a business’ financial transactions, such
as purchases, expenses, sales revenue, invoices,
and payments. They will record financial data into
general ledgers, which are used to produce
the balance sheet and income statement.
The bookkeeper is generally responsible for
overseeing the first six steps of the Accounting
Cycle, while the last two are typically taken care of
by an accountant. While there is a general overlap
between the two professions, there are a few
distinctions that are later discussed in this article.
Users of Accounting
Information
Who are the Users of Accounting
Information?
Ans:- Accounting is the language of
business, it brings life to the
otherwise lifeless business
activities. It acts as a bridge
between users of the information
and the day to day transactions
that occur inside a business. Users
of accounting information may be
inside or outside a business.
Internal users (primary users) – If a
user of the information is part of the
business itself then he/she is
considered as one of the internal or
primary users of accounting
information.
External users (secondary users) –
If a user of the information is an
external party and is not related to
the business then he/she is
considered as one of the external or
secondary users of accounting
information.
Internal Users
These are individuals inside the organization who
use accounting information for operational
decisions and organizational planning:
• Owners and stockholders: Use accounting data
to evaluate financial performance, determine
profitability, and guide investment decisions.
• Management and directors (e.g. CEOs, VPs):
Require timely financial info to plan, control
operations, set targets, and make strategic
adjustments.
• Employees and internal departments:
Interested in the company’s ability to sustain
salaries, bonuses, future growth, and job security.
• Internal auditors: Ensure accuracy, compliance,
and the integrity of internal financial reporting.
External Users
These are outside stakeholders who depend on financial
reports (often prepared under GAAP or IFRS) to make
decisions:
Investors and prospective shareholders: Evaluate
profitability, risk, and future returns before investing.
Creditors and lenders (e.g., banks, bondholders):
Assess creditworthiness and repayment ability by
analyzing liquidity, solvency, and financial ratios.
Customers and suppliers/trading partners:
Suppliers check the company's reliability; major
customers ensure the company can fulfill long-term
commitments.
Regulatory agencies and government: Use financial
reports to enforce tax laws, monitor compliance, and
safeguard public interest.
General public and news media/journalists: Monitor
corporate behavior, environmental practices, and
economic contributions.
• Investment analysts and rating agencies: Analyze
financial disclosures to issue recommendations and
Government (as a Specific
External User)
Agencies such as the tax
department, municipal regulators,
and standard‑setting bodies are
considered distinct external users:
Tax authorities and regulators:
Use financial statements to assess
tax liabilities and compliance.
What is the Basis of
Accounting?
Business transactions are
documented in the books of
account according to one of three
accounting bases: (i) Cash Basis
of Accounting; (ii) Accrual Basis
of Accounting; or (iii) Hybrid Basis
of Accounting.
Cash Basis of Accounting
The cash basis of accounting is a method
of accounting in which transactions are
recorded in the books of account when
cash is received and paid.
Credit transactions, such as credit
purchases and sales, are not recorded in
the books of account under this method.
When cash is paid or received, they are
documented in the books of account.
When cash is received, revenue is
recognized using the Cash Basis of
Accounting.
Cash Basis of Accounting
(Contd)
Goods sold on credit, for example, will
not be recorded until the sale proceeds
are received. Accrued income and
income received in advance are not
calculated and recorded since revenue
is recognized on a cash basis.
Expenses, on the other hand, are only
recorded as incurred once they have
been paid. If a salary is paid in April for
the month of March, for example, it will
be recorded in April. Outstanding and
prepaid expenditures are not evaluated
Accrual Basis of Accounting
According to the accrual basis of
accounting revenue and costs are
recorded in the period in which they
become due, rather than when they are
received or paid, Credit sales, for
example, are included in total sales for
the period, regardless as to whether
money is received or not.
Similarly, if a company uses a service but
does not pay for it, the expenditure is
recorded in the books in the year in which
the service is used, not in the year in
which the payment is made.
Hybrid Basis of Accounting
It is a mix of the Cash Basis and the
Accrual Basis of Accounting. Revenues
are accounted for on a Cash Basis, while
costs are accounted for on an Accrual
Basis, under the Hybrid Basis of
Accounting (also known as Mixed System
of Accounting).
In practice, this method of accounting is
not employed since it fails to
appropriately assess income.
Furthermore, no authority, including tax
authorities, accepts the hybrid basis of
What is double-entry
accounting?
Double-entry accounting is a system
of bookkeeping in which every
financial transaction is recorded in at
least two accounts. This system
provides a check and balance for
each transaction, which helps ensure
accuracy and prevent fraud. It also
allows you to track business finances
more effectively and make better
decisions about where to allocate
your resources.
Account types
The five main types of accounts used in double-
entry bookkeeping are as follows:
Asset accounts represent the resources of a
business, such as cash, inventory, and
equipment.
Liability accounts represent the debts of a
business, such as loans and accounts payable.
Income accounts represent the revenue of a
business, such as sales and interest income.
Expense accounts represent the costs of a
business, such as rent and utilities.
Equity accounts represent the funds invested
in a business and the amount of profit left after
operation costs, also known as retained income.
Single-entry vs. double-entry
accounting
Single-entry accounting is a system in
which transactions are recorded once,
either as a debit or credit, in a single
account. This method is simpler and
can be used by smaller businesses.
Double-entry accounting is a system
where you record each transaction in
at least two accounts. This method
provides a more complete picture of a
business’s finances and is typically
used by larger businesses.
How double-entry
accounting works
Double-entry accounting is the
most common type of accounting
used by businesses. It’s based on
the concept that every financial
transaction has two sides: a debit
side and a credit side. The ledgers
must have every transaction in a
business with at least one debit
entry and one credit entry. The
accounting equation is the
foundation of double-entry
What Is the Accounting
Equation?
The accounting equation is a fundamental
concept that states that a company’s total
assets are equal to the sum of its liabilities
and its shareholders’ equity. This
straightforward relationship between
assets, liabilities, and equity is the
foundation of the double-entry accounting
system.
The accounting equation ensures that the
balance sheet remains balanced. Each
entry made on the debit side has a
corresponding entry or coverage on the
credit side.
Basic Accounting Equation
Asset = Liability + Capital.
Liabilities= Assets - Capital.
Owners'
Equity (Capital) = Assets –
Liabilities.
How the Accounting Equation
Works
The financial position of any business is
based on two key components of the
balance sheet: assets and liabilities.
Owners’ equity or shareholders’ equity is
the third section of the balance sheet.
The accounting equation is a representation
of how these three important components
are associated with each other.
Assets represent the valuable resources
controlled by a company and liabilities
represent its obligations. Both liabilities and
shareholders’ equity detail how the assets
of a company are financed.
It will show as a liability if it’s financed
Assets
Assets include cash and cash equivalents or
liquid assets. These may include Treasury
bills and certificates of deposit (CDs).
Accounts receivable lists the amounts of
money owed to the company by its
customers for the sale of its products.
Inventory is also considered to be an asset.
The major and often largest value assets of
most companies are their machinery,
buildings, and property. These are fixed
assets that are usually held for many years.
Liabilities
Liabilities are debts that a
company owes and costs that
it must pay to keep running.
Debt is a liability whether it's
a long-term loan or a bill
that's due to be paid. Costs
can include rent, taxes,
utilities, salaries, wages, and
dividends payable.
Shareholders’ Equity
The shareholders’ equity number is a
company’s total assets minus its total liabilities.
It can be defined as the total number of dollars
that a company would have left if it liquidated
all its assets and paid off all of its liabilities. This
would then be distributed to the shareholders.
Retained earnings are part of shareholders’
equity. This number is the sum of total
earnings that weren't paid to
shareholders as dividends.
Think of retained earnings as savings. It
represents the total profits that have been
saved and put aside or “retained” for future
use.
Gains and Losses
Gains and losses are the opposing financial results that are
produced through a company's non-primary operations and
production processes. It's considered a capital gain any time
a company produces a profit or realizes increased value
through secondary sources such as lawsuits, investments in
financial instruments, or the disposal of assets.
A loss is realized when a company loses money through a
secondary activity. The determination of gain versus loss is
dependent on the book value of the asset according to the
company's financial documents when a company sells an
asset. A loss will also be recorded if a company is ordered by
a judge to pay to settle a lawsuit or if it loses money on a
financial investment.
Gains and losses are treated differently for tax purposes
depending on if they're short-term, usually occurring in 12
months or less, or long-term, taking place over more than
one year). Gains can typically be offset by corresponding
losses for tax purposes
Revenues and Expenses
Revenues and expenses aren't opposite financial results
of the same activities, unlike gains and losses. Revenue
is the term used to describe income earned through the
provision of a business's primary goods or services.
Expense is the term for a cost incurred in the process of
producing or offering a primary business operation.
Investors and analysts will typically give far more weight
to these metrics than to losses or gains.
Revenues are the gross proceeds a company receives
when it sells its goods or services and are sometimes
simply referred to as "sales." There's always a set of
costs involved with production, both fixed and variable.
These must be deducted as expenses from revenue to
compute a company's net profit.
Expenses are the most diverse of the four terms.
Expenses can be related to a multitude of different types
of costs such as labor including salaries, wages,
employee benefits, marketing and advertising, rent,
Where Are Gains and Losses
Reported?
A company's gains and losses
measure the financial results of
non-primary operations and
are reported in the income
statement. These may include
the disposal of assets or
financial investments.
Does Revenue Mean the Same
Thing as Profit?
No. Revenue reflects how
much a company has made
through sales while profit is
the amount that's made net
of expenses such as
salaries, overhead, and
production costs.
Are Gains Considered Revenue?
It may be recorded in its total
revenue for a given period when a
company reports a gain such as the
sale of an asset. Total revenue
includes operating revenue, which is
sales from primary business
activities, as well as non-operating
activities in this way. Gains fall under
non-operating activities because
they're not a part of a company's
core business operations.
The Accounting Cycle
Analyzing and recording transactions
represent the first steps in one
continuous process known as the
accounting cycle. The accounting cycle is
a step-by-step process to record business
activities and events to keep financial
records up to date. The process occurs
over one accounting period and will
begin the cycle again in the following
period. A period is one operating cycle of
a business, which could be a month,
quarter, or year. Review the accounting
cycle in Figure.
First Four Steps in the
Accounting Cycle
The first four steps in the
accounting cycle are
(1) identify and analyze
transactions,
(2) record transactions to a
journal,
(3) post journal information to a
ledger, and
(4) prepare an unadjusted trial
balance.
