Introduction to Accounting

Learning Objective: Explain the purpose and types of accounting

Have you ever wondered how a shopkeeper in Asan Tole, Kathmandu, keeps track of daily sales, expenses, and profits? Whether it is a small tea shop in Pokhara or a large enterprise like Chaudhary Group, every business needs a systematic way to record and report financial information. That system is called accounting.

What Is Accounting?

Accounting is the process of identifying, recording, classifying, summarizing, and interpreting financial transactions of a business. It is often called the "language of business" because it communicates a company's financial health to various stakeholders.

Purpose of Accounting:

• Record all business transactions systematically
• Determine profit or loss over a specific period
• Show the financial position (assets, liabilities, equity) at any point in time
• Help owners, managers, and investors make informed decisions
• Ensure compliance with tax laws and government regulations

Users of Accounting Information

Different people need accounting information for different reasons:

| User | Why They Need It | |------|-----------------| | Owners/Shareholders | To know whether the business is profitable | | Managers | To plan budgets and make daily decisions | | Banks/Lenders | To decide whether to grant a loan | | Government/IRD | To assess taxes (e.g., Nepal's Inland Revenue Department) | | Employees | To understand job security and bonus potential | | Customers/Suppliers | To evaluate the reliability of the business |

Types of Accounting

1. Financial Accounting deals with preparing financial statements (Income Statement, Balance Sheet) for external users. For example, Nabil Bank publishes its annual report so shareholders and Nepal Rastra Bank can review its performance.

2. Management Accounting provides internal reports to help managers make decisions. A factory in Biratnagar might use management accounting to decide whether to expand production.

3. Cost Accounting focuses on calculating the cost of producing goods or services. A carpet manufacturer in Kathmandu uses cost accounting to determine how much each carpet costs to produce, ensuring the selling price covers costs and earns a profit.

Key Term: Bookkeeping is the recording part of accounting -- writing down every transaction. Accounting goes further by analyzing and interpreting that data.

Summary

• Accounting is the systematic recording and interpretation of financial transactions.
• It serves both internal users (managers) and external users (banks, government, investors).
• The three main types are financial accounting, management accounting, and cost accounting.
• Every business in Nepal, from a local kirana pasal to a listed company on NEPSE, depends on accounting.