Fundamentals of Accouting: Introduction to Accounting
2- Introduction to Accounting
Hey there! Welcome to your first lesson in accounting! I promise you it’s not as scary as
it sounds, but you will see how interesting this subject is once you understand its
importance and usefulness in our world. So, let’s break it down step by step.
2.1 Understanding Accounting
Imagine you own a small business, maybe a bakery. You’re selling delicious cakes,
buying ingredients, paying workers, and keeping track of how much money is coming in
and going out. If you don’t keep proper records, how will you know if you're making a
profit or a loss?
Definition:
“Accounting is the process of recording, organising, summarising, analysing,
and reporting a business's financial transactions.”
Simply put, it keeps track of money; where it comes from, where it goes, and what
remains.
➕ Think of accounting as a financial diary where every transaction is recorded,
organised, and analysed to make smart business decisions.
2.2 Who Uses Accounting?
You will find accounting everywhere! It’s used by:
Businesses – From small shops to giant corporations, every business needs
accounting.
Individuals – Even you! Ever made a budget to manage your personal finances? That’s
personal accounting.
Government – Governments use accounting to manage public funds and expenses.
Non-profits – Even charities track their donations and spending.
1
Ifat Sarfraz (ACMA, APFA)
2.3 Why is Accounting Important for a Business?
Accounting is the language of a business. Without it, businesses wouldn’t know if they
are growing or failing.
Here’s why accounting is super important for a business:
Tracks Income & Expenses: Helps you see how much money you’re making and
spending.
Helps in Decision Making: Should you expand? Hire more staff? Increase prices?
Accounting gives you the right numbers to make smart decisions.
Legal & Tax Compliance: Governments require businesses to report their earnings
and pay taxes. Good accounting ensures you don’t get into trouble!
Attracts Investors & Lenders: If you ever need a loan or an investor, they will ask for
financial records before trusting you with money.
➕ Simply put, accounting = organised money management!
2.4 Objectives of Accounting for a Business
The primary objective of accounting is to provide information for decision making. But
there are many other objectives that accounting serves for the business, including;
Recording Financial Transactions – Systematically record all financial transactions to
maintain accurate and reliable financial records.
Tracking Financial Performance – Measure profitability and assess business
performance over time.
Assessing Financial Position – Provide a clear view of assets, liabilities, and equity at
a given point in time.
Facilitating Decision-Making – Help management make informed decisions regarding
investments, expenses, pricing, and strategy.
Ensuring Regulatory Compliance – Maintain financial records in accordance with
laws, tax regulations, and accounting standards (e.g., IFRS, GAAP).
Providing Information to Stakeholders – Offer relevant financial data to investors,
creditors, employees, and other stakeholders for decision-making.
Preventing & Detecting Fraud – Establish internal controls to prevent financial
mismanagement, fraud, and errors.
2
Fundamentals of Accouting: Introduction to Accounting
Determining Tax Liabilities – Calculate and report taxes accurately to comply with
government requirements.
Supporting Audits & Transparency – Ensure financial statements are clear, accurate,
and auditable for external verification and business credibility.
2.5 Users of Business Accounting Information
Accounting information lets the owners of the business know the worth of their
business. But this information is not only used by owners with the objective of making
smart decisions for their businesses, but there are also other possible users with their
respective objectives. These users (owner and others) of accounting information of a
business are often called ‘Stakeholders’.
Stakeholder:
“A stakeholder is any individual, group, or entity that has an interest in or is
affected by the activities, decisions, or performance of a business.”
Stakeholders can be internal (such as owners, employees, and management) or
external (such as suppliers, investors, customers, creditors/lenders, government, and
the public). Their interests may include financial returns, operational performance, legal
compliance, or social responsibility.
Managers – These are the day-to-day decision-makers of the business. They need to
know how well things are progressing financially and about the financial status of the
business.
A prospective buyer – When the owner wants to sell a business, the buyer will want to
see such information.
The bank or other lenders of money – If the owner wants to borrow money for use in
the business, then the bank or lenders will need such information.
Tax inspectors – They need it to be able to calculate the taxes payable.
Investors – Either existing ones or potential ones- want to know whether or not to
invest their money in the business.
Employee – Employees can use this information to assess the job security and to
evaluate the company’s profitability for salary increments and bonuses.
3
Ifat Sarfraz (ACMA, APFA)
Customers – They want this information to ensure the company’s financial stability for
long-term services and products availability.
Suppliers – They want to know the credit-worthiness (ability of the business to make
timely payments) of the business before extending trade credit.
Public – The public at large is more interested in the business’s economic impact on
society (e.g., employment generation, CSR activities).
2.6 The Accounting Process
Accounting follows a few basic steps:
Identify Transactions: Anything involving money—buying, selling, borrowing, etc.
Record Transactions: Write them down in a systematic way (Prepare Journal)
Classify & Summarise: Organise them into categories like income, expenses, assets,
etc. (Make Ledgers & Trial Balance)
Analyse & Interpret: Understand what the numbers mean for financial health.
Report: Share the information through financial statements.
This series of steps followed to perform the process of accounting is also referred to as
the Accounting Cycle.
2.7 Common Accounting Terms
Assets – Things a business owns (cash, equipment, property).
Liabilities – What a business owes (loans, debts).
Capital – Owner’s investment in the business.
Revenue – Money earned from sales.
Expenses – Money spent to run the business.
Profit – Revenue minus expenses.
Loss – When expenses are greater than revenue
Summary
● Accounting = Recording & analysing financial transactions.
● It helps track income, expenses, and business health.
● Used by businesses, individuals, and governments.
● Accounting aims to record transactions, ensure compliance, support decisions,
and maintain financial transparency.
4
Fundamentals of Accouting: Introduction to Accounting
● Accounting information is used by stakeholders like owners, managers,
investors, lenders, employees, customers, suppliers, tax authorities, and the
public for decision-making, financial assessment, and business evaluation.
● Involves identifying, recording, analysing, and reporting transactions.
📝 Quick Practice Questions
Multiple Choice (Choose the Correct Answer)
1. What is the main purpose of accounting?
a) Cooking food
b) Recording and analysing financial transactions
c) Marketing products
d) Hiring employees
2. Who is not a stakeholder in a business?
a) Investor
b) Employee
c) Customer
d) Neighbour’s pet
3. Which of these is an example of an asset?
a) Loan payable
b) Rent expense
c) Cash
d) Bank interest
Fill in the Blanks
4. __________ is the owner’s investment in the business.
5. Revenue minus expenses equals __________.
6. The process of analysing and reporting financial data is called __________.
5
Ifat Sarfraz (ACMA, APFA)
True or False
7. Only big companies need accounting.
8. Suppliers are considered external stakeholders.
9. Expenses are the money a business earns from sales.
1. b) Recording and analysing financial transactions
2. d) Neighbour’s pet
3. c) Cash
4. Capital
5. Profit
6. Accounting
7. False
8. True
9. False
