Accounting

Accounting is the process of recording, classifying, summarizing, and interpreting a business’s financial information. It turns raw numbers into meaningful insights, helping owners, managers, investors, and regulators make informed decisions.

Why It Matters

Without accounting, a business wouldn’t know if it’s profitable, losing money, or heading toward trouble. It acts like a financial health report card, showing where money comes from, where it goes, and what’s left.

Key Points

• Purpose: Measure financial performance and position.
• Scope: Goes beyond bookkeeping to include financial reporting, analysis, budgeting, and tax compliance.
• Main Branches:
  • Financial Accounting – For external users like investors, creditors, and regulators.
  • Management Accounting – For internal decision-making.
  • Cost Accounting – Focuses on controlling and reducing costs.
• Users: Owners, managers, employees, investors, creditors, government agencies, and the public.

Example

If your company earns $10,000 in sales and spends $7,000 on expenses, accounting organizes that information into reports showing a $3,000 profit.

Common Misconceptions

• “Accounting is just bookkeeping.” Not true. Bookkeeping records transactions, but accounting analyzes and reports them.
• “Accounting is only for taxes.” In reality, it’s also for decision-making, planning, and measuring success.

Quick FAQ

Q: What are the 3 main types of accounting?
A: Financial, Management, and Cost Accounting.

Q: Is accounting the same as bookkeeping?
A: No. Bookkeeping records transactions; accounting analyzes, summarizes, and reports them.