What accounting is

Run any business and things keep happening: you buy goods, sell goods, pay the shop's rent, pay the electricity bill, pay a salary. Accounting is the way of keeping track of all this. In the book's words, it is the process of identifying, measuring, recording and communicating information about a business's economic events to the people who need it.

An economic event is something that matters to the business and can be measured in money. Some events are external: they involve outsiders, like selling goods to a customer, buying from a supplier or paying rent to the landlord. Others are internal: they happen inside the business, like the store room sending materials to the factory floor.

The big rule: only what can be measured in money goes in the books. If the owner says "we bought four trucks today", the accountant cannot record anything until he knows what the trucks cost. Hiring a new manager, changing a policy, or the owner giving his own child pocket money from home: no money comes into or goes out of the business, so none of these is recorded. (The new manager's salary, once paid, is.)

You do a transaction (pay rent, pay a salary). An event can also just happen (a machine loses value as it wears out). Both are recorded, as long as they can be put in rupees.

Accounting works in a fixed order. Identify the money events and ignore the rest. Measure each one in rupees. Record it, in date order, in the first book (the journal). Classify it, by putting similar items together in the ledger. Summarise it in statements at the end of the year. Then analyse the results (is profit up or down from last year?) and communicate them in reports. Accounting is no use if the results never reach anyone.

Who reads these reports? Internal users work inside the business: the owners, the management and the employees. External users are outside it: investors, banks and other lenders, suppliers, customers, the government and its tax departments, and others such as researchers.