Accounting Basics

Learning Objectives

By the end of this lesson, students will be able to:

1. Define accounting from various authoritative perspectives, including those of AICPA, APB, and AAA.

2. Explain the purpose and functions of accounting in business decision-making.

3. Differentiate between the three main forms of accounting: Financial Accounting, Management Accounting, and Tax Accounting.

4. Identify internal and external users of financial information and understand their respective information needs.

5. Describe the structure and components of financial statements (e.g., Balance Sheet, Income Statement, Cash Flow Statement).

6. Compare the American and British approaches to accounting terminology and formatting.

Accounting Definition

The popular accounting definition is the language of the business (Warren Buffett). Language is a way to communicate ideas or information, so in this way accounting is considered a way or path in business studies to communicate different aspects of business financial matters. For instance, a manager says that his/her organization gains profit, so all respondents easily understand that his organization gets something in the form of money/value. In this example, the word profit is a term of business language.

In 1941, According to the American Institute of Certified Public Accountants (AICPA), accounting is an 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.

In 1966, American Accounting Association 1966 (AAA) defines accounting as the process of identifying, measuring, and communicating economic information to permit informed judgment and decisions by the use of information.

Accounting Definition according to Henry Rand Hatfield, Accounting is the science of recording and classifying business transactions and events, primarily of a financial character, and the art of making significant summaries, analyses, and interpretations of those transactions and events and communicating the results to persons who must make decisions or form judgments.

Eric Kohler (Author of Dictionary for Accountants) has given accounting definition as, Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

Professor R.N. Anthony (Harvard Business School), Accounting is a means of collecting, summarizing, analyzing and reporting in monetary terms, information about the business.

Oxford Dictionary of Accounting, Accounting is the process or work of keeping financial accounts.

Cambridge Business Dictionary, Accounting is the skill or activity of keeping records of the money a person or organization earns and spends.

International Accounting Standards Board (IASB), Accounting is the process of recording, summarizing, and reporting the myriad of transactions resulting from business operations over a period of time.

Investopedia, Accounting is the process of recording financial transactions pertaining to a business. This includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.

Collectively, these definitions portray accounting as both a science and an art—a structured process involving the recording, classifying, summarizing, and interpreting financial data. Whether for internal decision-making or external reporting, accounting serves as a critical communication tool in business. It provides quantitative, monetary information that enables various users—managers, investors, regulators, and the public—to make informed economic decisions. Despite the variety in expression, all definitions converge on a common theme: Accounting is essential for tracking financial activities and facilitating transparency, accountability, and strategic planning.

Check your understandings _ Accounting Definition MCQs

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Types of Accounting

Accounting is the process of identifying, measuring, recording, and communicating an organization’s economic activities to users of financial statement. Business stakeholders need information for decision making. There are two types of accounting:

• Financial Accounting and
• Management Accounting

Financial Accounting

Financial accounting can be described as the classification and recording of monetary transactions of an entity in accordance with established concepts, accounting  principles, standards and legal requirements, and their presentation, by means of various financial statements, during and at the end of an accounting period. Financial accounting is the area of accounting that focuses on external reporting and meeting the needs of external users.

Management Accounting

Management Accounting is accounting for internal used by organization and an internal part of management concerned with identifying, presenting and interpreting information.

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User of Financial Information

Users need information for decision making. There are two type of user for financial information:

• Internal Users and
• External Users

Internal Users

Internal users of accounting information are managers who plan, organize, and run the business. Internal users of accounting information work for the organization and are responsible for planning, organizing, and operating the entity. The area of accounting known as managerial accounting serves the decision-making needs of internal users. These include marketing managers, production supervisors, finance directors, and company officers. Internal users are associated with management of the organization.

External Users

External Users are individuals and organizations outside a company who want financial information about the company. External users do not work for the organization and include investors, creditors, labor unions, and customers. Investors (owners) use accounting information to make decisions to buy, hold, or sell ownership shares of a company. Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money. The external users consist of several explicit groups, which are outside the organization and has interest (financial and non-financial) in an organization.

>>> Study User for Financial Statement

Purpose of Accounting

The purpose of accounting is to provide useful information for effective and efficient decision making. Right information for right decision is based on accounting information system. Accounting provides different financial statements for business information. These statements are:

• Income Statement
• Statement of Owner’s Equity
• Balance Sheet
• Cash Flow Statement

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 Financial Statement

End results of financial accounting are financial statement. The financial picture mostly has two parts, one showing how much profit has been earned or loss suffered, and the other showing assets and liabilities and proprietors’ interest in the business. Even institutions which do not have the earning of profit as an objective must know periodically, whether the current income is sufficient to meet the current expenditure and what financial state of affairs is. In fact, wherever the resources are scarce, it is wise to take stock regularly, monthly, six-monthly or annually, of what has happened and where the institution concerned stands.

>> Practice Accounting Basics Quiz 1 and Quiz 2.

This lesson provides an introduction to the foundational principles of accounting, emphasizing its role as the language of business. Accounting is defined as a systematic process of recording, classifying, summarizing, and interpreting financial transactions to support informed decision-making. The lesson explores various definitions provided by recognized accounting bodies such as AICPA, APB, and AAA, reinforcing the idea that accounting is both a service activity and a means of communication in the business environment. It distinguishes between the three major forms of accounting: financial accounting, which focuses on preparing general-purpose financial statements for external stakeholders; management accounting, which supports internal decision-making through detailed reports and performance analysis; and tax accounting, which involves preparing tax returns in compliance with national laws. The lesson also categorizes users of accounting information into internal users (such as managers and executives) and external users (including investors, banks, and government agencies), each with distinct informational needs. Additionally, it introduces the purpose of accounting as a tool to aid sound economic decisions and explains the two primary accounting approaches—American and British—highlighting key differences in terminology. The lesson concludes by emphasizing that the ultimate output of financial accounting is the set of financial statements, which are essential for evaluating a business’s financial health and guiding future strategies.

Further Readings

Principles of Accounting

Accounting Examples

Accounting MCQs

Accounting Problems

Accounting Questions

References

Shukla, M. C., Grewal, T. S., & Gupta, S. C. (2008). Advanced Accountancy (Vol. I & II). New Delhi: S Chand & Co.

Shukla, M. C., Grewal, T. S., & Gupta, S. C. (2008). Corporate Accounting. New Delhi: S. Chand and Co.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2012). Accounting Principles (10th ed.). Hoboken: John Wiley & Sons, Inc.

Williams, M., & Bettner, H. (1999). Accounting (The basic for business decisions). (11th, Ed.) USA: Irwin McGraw- Hill.