What is accounting? | Accounting 101 EXPLAINED!

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Accounting is the art of identifying, analyzing, classifying, recording, and presenting all monetary business transactions.

Accounting provides a complex set of rules for all monetary business transactions. The accounting cycle starts with booking the transaction in journals, posting it in the General ledger, Making a Trial balance, adjusting the trial balance, Making Financial Statements, and closing the books. Accounting helps in reporting the financial data of a company to its stakeholders. It also helps with Auditing, Taxation, Budgeting, and making business decisions. Widely accounting is governed by reporting standards such as IFRS, GAAP, etc. Accounting standards provide the framework for the presentation and publication of Financial Statements.

Heads of Accounting

Accounting heads are fundamental accounts, and all business transactions possess the properties of one or more of them. Heads of accounts are known as:

  • Assets ( Resources owned/ controlled by business)
  • Expenses ( Outflow of resources to carry on business)
  • Liabilities ( Obligations payable by business)
  • Equity ( Investment of entrepreneur )
  • Revenue ( Inflow of Resources i.e: Sales )

Accounting Heads further explained here.

The Accounting Equation

Assets = Liabilities + Equity

The accounting equation represents the Financial position of a business. It means that the total assets of the business should be equal to the total liabilities and Equity. Assets are resources owned/ controlled by the business, liabilities are the obligations payable by the business, and equity is the measure of the net investment of the business.

Debits and Credits

debit and credit
Debit and credit

All accounting transactions have debits and credits according to their head of accounts. A debit increases Assets and Expenses and a credit decreases both. While credits increase Liabilities, revenue, and equity and debit decreases these three.


Bookkeeping is the art of recording the monetary business transaction. It involves identifying the nature of the transaction, determining debit and credit, and choosing the right journal to record transactions in. Bookkeeping is the entry point for financial data into the books of accounts. It also involves maintaining the supporting documents and vouchers for the entries. The purpose of bookkeeping is to provide accurate financial information about a business for making decisions.

Financial Statements

Financial statements are reports of financial data that are published once every year to provide users with a summary of all year’s activities of a business. They provide a detailed overview of profit and loss, Financial Position( Assets=liabilities+capital ), Cash flows, changes in equity, and Notes to the accounts. The purpose is to provide the users with a “TRUE AND FAIR” view of all monetary business information throughout the year. The user includes shareholders, customers, creditors, the government, and other stakeholders in the business. Financial Statements include:

1. Statement of Comprehensive income

It is the summary of Profit and loss that shows income and expenses to calculate the profit that a business may earn during the financial year.

2. Statement of Financial Position ( Balance Sheet)

The balance sheet is the statement that shows the accounting equation in full effect. The value of total Assets must be equal to total Liabilities plus Equity. The balance sheet shows all the assets Liabilities and equity in a detailed summary statement and this statement must reconcile.

3. Statement of Cash Flows

Cash flow is the presentation of the inflow and outflow of cash into the business, through operational, investment, and financing activities.

4. Statement of Changes in Equity

It shows the change in the investment of the entrepreneur due to the business activity( Profit and Loss).

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