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.