1 What is Accounting

Fundamentally, accountingAccounting:
The language of business. It is the process of aggregating information to produce financial statements for internal and external users. is a process of aggregating or bringing together information so that people can use this information to make good decisions. You’ve made a great choice to study accounting because accounting is the language of business and touches every facet of business: operations, marketing, human resources, entrepreneurship, and finance. Not only that, but studying accounting will help you make smart personal financial decisions. In our communities, knowledge of accounting is crucial to achieving financial success, both personally and commercially. With this in mind, let’s dive in.

Accounting is a language used to understand and communicate financial information. This language can help us understand our personal finances better, such as reading our bank account, buying a new pair of pants or a car, grocery shopping, or getting student loans. And accounting language is universally used by businesses. Let’s look at two examples: one in personal accounting and the other in business accounting.

Personal accounting:

let’s say that you buy a new pair of sneakers with your debit card. In this simple transactionTransaction:
An economic activity engaged in by an entity. Accountants record transactions and aggregate their effects on the entity’s financial statements. In this way, accountants tell the truth about the economic reality of entities., accounting gives us a framework to record that your bank balance has gone down, but your sneaker collection has increased. Essentially, you haven’t lost any value, you’ve just moved that value from your bank account to your sneaker collection.

Business accounting:

let’s use the example of a bookstore. The bookstore will buy books and pay with cashCash:
Physical cash (petty cash, cash in registers, and cash in a safe) and cash in bank accounts (chequing and savings accounts).. Here again, the transaction causes the company’s bank balance to go down, but their inventory of books has gone up. The company hasn’t lost value, just moved the value from their bank account to their book collection.

Accounting creates a common framework to create meaning. As such, accounting records transactions, which convey meaningful information. In the examples above, we see value in $$ moving from the bank account to an inventory account—sneakers or books.

But how does information actually get recorded and put together? A whole world of accounting systems and processes are used to record, aggregate, and sort transactions into a meaningful form. In this chapter we will discuss the why of accounting (and why accountants are actually superheroes), who uses financial information (everyone!), and what financial information should look like so that it’s easy to use for decision making.