Understanding the basics of accounting

A balance sheet is a summary of the financial balances of a sole proprietorship, partnership or any other business organisation

Finance is an important aspect of our personal and professional lives. Days are gone when it was the job of only experts who were related to the finance or accounts department in a company or an organisation. Now even lay people need to have expertise in many areas including finance and accounting. Listed below is a comprehensive picture of the terms used in accounting.


What is accounts: Accounting is a systematic way to record transactions. An account (in bookkeeping) refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become part of a book of final entry or ledger. Examples of common financial accounts are cash, accounts receivable, mortgages, loans, PP&E (property, plant and equipment), common stock, sales, services, wages and payroll.

Balance sheet: In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organisation. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity, net assets, net worth or the capital of a company and according to the accounting equation, net worth must equal assets minus liabilities.

Profit & loss account: A profit and loss account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period.


MIS (Management Information System): A management information system (MIS) provides information that organisations need to manage themselves efficiently and effectively. MISs are typically computer systems used for managing three primary components: technology, people (individuals, groups, or organisations), and data (information for decision making). MISs are distinct from other information systems, in that they are used to analyse and facilitate strategic and operational activities.


Cost accounting: Cost accounting is a process of collecting, analysing, summarising and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

Financial accounting: Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. The fundamental need for financial accounting is to reduce principal–agent problem by measuring and monitoring agents' performance and reporting the results to interested users.



Statutory compliance: Statutory means "of or related to statutes", or what we normally call laws or regulations. Compliance means to comply with or adhere to. So statutory compliance means you are following the laws on a given issue. The term is most often used with organisations, who must follow lots of regulations. When they forget or refuse to follow some of those regulations, they are out of statutory compliance. A company that follows all the rules, is in statutory compliance. Many companies are out of statutory compliance, in part because the cost of following the rule is too high, and/or the consequence is too small to worry about.


Financial year & calendar year: A fiscal year (or financial year, or sometimes budget year) is a period used for calculating annual ("yearly") financial statements in businesses and other organisations. In many jurisdictions, regulatory laws regarding accounting and taxation require such reports once per 12 months, but do not require that the period reported on constitutes a calendar year (that is, 1 January to 31 December). Fiscal years vary between businesses and countries. The "fiscal year" may also refer to the year used for income tax reporting. In India, the financial year runs from 1 April to 31 March.

Read more:

Financial management: Introduction to basic accounting principles

Introduction to budgeting

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