Introduction to

Accounting
Accounting is the systematic process of recording, analyzing, and interpreting
financial transactions to provide useful information for decision-making. It
forms the backbone of business operations, enabling organizations to track
their financial health and make informed decisions.

by Chirag Goel
Basic Accounting
Terms
Understanding the fundamental concepts and terminology in accounting is
crucial for managing finances effectively. Let's explore the key accounting
terms that form the foundation of financial reporting and analysis.
Assets

1 Definition 2 Types of Assets

Assets are resources that a business or Examples include cash, investments,
individual owns and can use to generate inventory, property, equipment, and
economic value. intellectual property.

3 Valuation 4 Importance
Assets are recorded on the balance sheet and Managing and optimizing assets is crucial for
are valued at their original cost or current a business's financial health and profitability.
market value.
Liabilities
Definition of Liabilities
Liabilities are the debts,
obligations, and other financial
responsibilities that a company
or individual owes to others.
They represent claims against the
company's assets.
Common Liabilities
Examples of liabilities include
accounts payable, loans,
mortgages, credit card balances,
and accrued expenses like taxes
and employee wages.
Role in Financial
Statements
Liabilities are recorded on a
company's balance sheet,
alongside its assets and
shareholders' equity, providing a
complete picture of its financial
position.
Equity
Ownership
Equity represents the ownership
stake in a business. It's the
difference between a company's
assets and its liabilities.
Shareholders
Shareholders own a portion of
the company and have a claim on
its assets and profits. Their
equity is determined by the value
of their shares.
Retained Earnings
Equity also includes the
company's retained earnings,
which are profits that have been
reinvested back into the business
instead of being paid out as
dividends.
Revenue
Definition Importance
Revenue refers to the total amount of Revenue is a crucial metric that indicates
income generated from selling goods or a company's earning capacity and overall
providing services during a specific financial health. It's a key driver of
period. profitability and growth.

Types
There are different types of revenue, such as sales revenue, service revenue, and other
operating revenue, each with its own unique characteristics.
Expenses
Definition Types of Expenses

Expenses are the costs incurred by a business in Common types of expenses include rent, utilities,
order to generate revenue. They represent the salaries, marketing, supplies, and depreciation.
resources used up or consumed during the Businesses must track and manage their expenses
operation of the business. carefully to maintain profitability.
Profit and Loss
Understanding Profit and
Loss
The profit and loss statement,
also known as the income
statement, is a financial report
that summarizes a company's
revenues, expenses, and net
income over a specific period of
time.
Tracking Financial
Performance
By analyzing the profit and loss
statement, businesses can
monitor their financial
performance, identify areas for
improvement, and make
informed decisions to maximize
profitability.
Key Components
The main components of a profit
and loss statement include
revenue, cost of goods sold,
operating expenses, and net
income - the ultimate measure of
a company's financial success or
failure.
The Accounting Equation

1 Assets

2 Liabilities

3 Equity

The fundamental accounting equation is the foundation of double-entry bookkeeping. It states that a
company's total assets must equal the sum of its liabilities and shareholders' equity. This equation helps
ensure that a company's books are balanced and provides a framework for understanding a business's
financial position.
Financial Statements
Financial statements are the key reports that summarize a company's
financial health and performance. They provide a comprehensive overview of
a business's assets, liabilities, equity, revenue, and expenses.