Accounting is the systematic process of recording, classifying, summarizing, and interpreting financial transactions of a business. It's often called the "language of business" because it communicates a company's financial health to owners, investors, regulators, and tax authorities.
"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 results thereof."
— American Institute of Certified Public Accountants (AICPA)
In simpler terms, accounting answers three fundamental questions for any business:
How much money did we make?
Revenue, sales, income tracking
How much did we spend?
Expenses, costs, payments tracking
What do we own & owe?
Assets, liabilities, equity tracking
Without accurate financial data, you're guessing. Accounting tells you which products are profitable, which customers owe you, and whether you can afford to hire.
Every business must file tax returns. Accounting ensures you track income, expenses, and deductions correctly — avoiding penalties and audits.
Banks and investors require financial statements before lending money or investing. Clean books signal a well-managed business.
Compare this month vs last month, this year vs last year. Spot trends early — declining margins, rising costs, seasonal patterns.
For: External stakeholders (investors, regulators, banks)
Preparing standardized financial statements — Balance Sheet, P&L, Cash Flow. Governed by standards like IFRS, GAAP, or Ind AS.
For: Internal management
Budgets, forecasts, variance analysis, cost-volume-profit analysis. Helps managers make operational decisions.
For: Tax authorities (IRS, Income Tax Dept, Revenue)
Computing taxable income, filing returns, managing deductions, GST/VAT compliance. Rules differ from financial accounting.
For: Internal — production & pricing teams
Tracking cost per unit, overhead allocation, break-even analysis. Critical for manufacturing and product businesses.
For: External auditors, internal audit teams
Independent verification of financial statements. Statutory audits are mandatory for companies above certain thresholds.
Assets = Liabilities + Equity
This equation must ALWAYS balance. Every transaction affects at least two accounts.
What the business owns — cash, inventory, equipment, receivables, property.
What the business owes — loans, payables, tax due, accrued expenses.
Owner's claim — capital invested + retained profits. Assets minus Liabilities.