Introduction to Accounting

2026-10-07

Start with a grocery shop. In a month the owner buys goods worth ₹5,00,000, sells them for ₹8,00,000 and pays ₹5,000 for electricity. If they only watch goods going in and coming out, the profit looks like ₹3,00,000. Once the electricity is counted it is ₹2,95,000, assuming everything bought was sold. Accounting is what makes sure the electricity bill, and everything like it, is not forgotten.

The textbook describes accounting as a process rather than just writing things down, and the process has seven steps. Here they are applied to one ordinary company transaction: buying ₹10,000 of raw material from a supplier.

The GST sits apart from the inventory because a registered company can generally claim it back as input tax credit, so it is not part of what the material cost.

It holds only for rule-driven entries, though. Where an entry rests on an estimate or a judgment, a person still has to decide. When the month closes and the electricity bill has not arrived, I estimate the amount and key in the accrual myself. A provision for a legal claim is the same: someone has to judge how much to set aside, and the system cannot do that for them.

Step five is also mostly the system's work, since the trial balance, profit and loss account and balance sheet come out of it at month-end. What a person adds is in steps six and seven: reading the numbers, checking they make sense, explaining what moved, and getting the picture to management.

That is also where the three words in the chapter finally separated for me. Bookkeeping is the first four steps: identifying, measuring, recording and classifying. Accounting is the whole seven-step process, which adds summarising, analysing and interpreting, and communicating. Accountancy is the discipline underneath both, the principles, rules and theory that say how all of it should be done.

Accounting information has two kinds of users. Internal users are the owner and management, who need it to run the business day to day: what profit was made, where cash is stuck, whether inventory levels are right, how much is owed to each supplier. External users sit outside the company. A bank wants to know whether it can lend and be repaid, an investor wants to know whether their money is safe, and the government wants to calculate tax.

When I was asked whether one report serves both groups, I said they get two, and that held up. Management gets internal reports that are detailed and frequent, daily or weekly, and built for decisions: inventory status, cash flow, supplier performance, department-wise spending. Investors, banks and the government get the financial statements, meaning the profit and loss account, balance sheet and cash flow statement, in a standard format, prepared at least once a year, audited, and shaped by legal requirements. Both come out of the same system and the same underlying data; they are just built differently for different readers.

An example makes the difference concrete. Say the company writes off ₹50,000 of inventory. Management wants the detail: which item, why (damage, theft, expiry), and what it does to the quarter's forecast. The published statements carry only the summarised figure, without the item-level detail.

The way I first put it was that a management report and a financial report are two different things. That is right. Accounting is one process, but the information has to be cut differently for each audience.

The chapter lists what accounting is for. As commonly taught, the objectives are keeping systematic records, working out profit or loss, showing the financial position, providing information to users, protecting the business's assets, and helping with decisions. Wording and count vary a little between editions, so check them against the book you are using.

At company level the useful question is who actually delivers each one. The first three are carried mostly by the system: it records every transaction that is posted, and the profit and loss account and balance sheet come out of it at month-end. The last three need people. Providing information means someone has to read the reports and explain them. Protecting assets means watching for fraud, theft and wastage. Helping with decisions means taking the numbers and recommending what to do about them.

The first three come with a condition carried over from 1.1: the profit the system reports is only as good as the entries behind it, including the judgment-based ones that people make.

The older view treats accounting as bookkeeping, keeping the record and nothing more. The wider view, which is the one that matches what happens in a company, is that accounting is the language of business: it is how different departments talk to each other in numbers.

Take a ₹10 lakh sales order. Accounting records no revenue yet, because nothing has been delivered and the order is only a commitment. But the order sets things moving. Production needs materials, so procurement buys them, which is an ordinary purchase like the one in 1.1. Management wants to know how much cash the order will tie up and what margin it will leave. When the goods are delivered and invoiced, revenue is recorded; the cost of producing them becomes the cost of goods sold; and when the suppliers are paid, what was owed to them is cleared. Every department is working on the same order, and the accounting numbers are what let them all see it the same way. Without them, nobody would know whether the order made money or whether it put cash under strain.

The terms in this part are written for a sole proprietor, one owner running a business. In a company most of them keep their meaning and a few change shape. Going through them one at a time:

Drawings become dividends, and the difference is who decides. Take a year with ₹1 crore of profit. A sole proprietor can take out ₹50 lakh and leave the rest in the business, on their own say-so. In a company the board of directors decides, say ₹30 lakh as dividend and ₹70 lakh kept for reinvestment, through a formal process with rules around it.

Profit is where the two worlds look most different. With ₹1 crore of revenue and ₹55 lakh of costs, a sole proprietor ends with one number, ₹45 lakh before tax. A company breaks the same result into layers:

The layers exist because different readers ask different questions. Operations looks at gross profit to see whether production is efficient. Management looks at operating profit to see whether the business itself is viable. Investors look at the profit after tax, the figure that is left at the end.

Two terms work the same way in both settings. A debtor is a customer who has taken goods and not yet paid, which a company's books show as accounts receivable. A creditor is a supplier we have bought from and not yet paid, shown as accounts payable.

Mostly yes. The seven steps are the same, but a system performs the routine ones and a person's value moves to the judgment-based entries and to reading, explaining and communicating the numbers. The users are the same two groups, and they get two different reports. The objectives are the same, with about half delivered by the software and half by people. The role is wider than record-keeping because every department talks in these numbers. And the vocabulary needs translating at exactly the point where one owner becomes many shareholders: capital turns into share capital, drawings into dividends, and a single profit figure into a ladder of them. I haven't tested every term in the chapter this way, only the ones above, so I'd treat the rest as unchecked.