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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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