What is Accounting? An Introduction to Accounting

Introduction

Accounting is the language of business. This article explains what accounting is, why it matters, who uses it, and the main branches of the field. Whether you’re a student, entrepreneur, or professional, understanding accounting is essential for making informed decisions.

🔍 Key Takeaways

Accounting is an information system that tracks, records, and communicates financial data about an entity.
Purpose: Provide relevant, accurate information to support economic decision-making.
Core process: Identify, record, classify, summarize, and report financial transactions.
Two main types: Financial accounting (external users) and managerial accounting (internal users).
Impact: Enables better planning, resource control, and accountability.

Definition of Accounting

Accounting is the systematic process of measuring, recording, and communicating financial information. It transforms raw transaction data into clear reports that show how a business is performing.

Objectives of Accounting

The main objectives of accounting include:

Recording financial transactions accurately
Classifying information by category
Summarizing financial activity
Reporting results in usable formats
Interpreting data to support decisions

Users of Accounting Information

External Users:

Investors
Creditors
Tax authorities
Regulators

Internal Users:

Managers
Employees
Executives

Branches of Accounting

Financial Accounting: Prepares reports for external stakeholders following standards like GAAP or IFRS.
Managerial Accounting: Provides internal reports to aid decision-making, budgeting, and performance.
Cost Accounting: Analyzes cost data to improve efficiency and pricing.
Tax Accounting: Ensures compliance with tax laws.
Auditing: Verifies the accuracy and fairness of financial statements.

Steps in the Accounting Process

Identify and analyze transactions
Record transactions in the journal
Post to the ledger
Prepare a trial balance
Create adjusting entries
Generate financial statements

Examples of Accounting Use

An investor reviews a company’s income statement before purchasing stock.
A manager uses cost reports to set product pricing.

Frequently Asked Questions About Accounting

What is accounting in simple terms?

Accounting is how a business records and explains its financial activities. It shows what the business owns, earns, and owes.

What is the main purpose of accounting?

To deliver reliable financial data that helps people—like investors or managers—make better decisions.

Who uses accounting information and why?

External users (investors, creditors, regulators) assess financial health.
Internal users (managers, staff) use it to plan, control costs, and evaluate performance.

What are the main types of accounting?

Financial accounting: External reporting (e.g., income statements).
Managerial accounting: Internal decision-making (e.g., budgets, cost analysis).
Other types include cost accounting, tax accounting, and auditing.

How is accounting different from bookkeeping?

Bookkeeping is the recording part. Accounting adds analysis, reporting, and strategic insights.