What is accounting and derive accounting equation?

Accounting is process of recording financial transactions of a firm. These recordings are classified into assets, liabilities, revenue, expenses, transactions and reporting. Recording the transactions can be done into −

  • System of book keeping.
  • Tracking transactions.
  • Making financial reports.

Objectives of accounting are as follows −

  • Maintain records.
  • Utility resources.
  • Profit and loss.
  • Financial position.
  • Decision making.

Different types of accounting are as follows −

  • Managerial accounting.
  • Tax accounting.
  • Financial accounting.
  • Auditing.
  • Forensic accounting.

Some of the advantages of accounting are as follows −

  • Maintains business records.
  • Decision making.
  • Comparison of results.
  • Valuation of business.
  • Financial statements preparation.
  • Taxation issues.

Some of disadvantages are given below −

  • Manipulation of accounts.
  • Based on estimation.
  • May be biased.
  • Only financial nature is measurable.
  • Change in price is not considered.

Accounting equation is as follows −

  • Asset = liabilities + owner equity
  • Liabilities = Asset – owner equity
  • Owner equity = asset – liabilities

Asset can be cash, accounts receivable, inventory, equipment etc.

Liabilities can be accounts payable, short – term borrowings, Long – term debt.

Shareholder’s equity can be share capital, retained earnings etc.

Updated on: 14-Aug-2020


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