Introduction

AuthorVern Krishna
Pages1-20
Chapter 1: Introduction
Without mathematics there is no art.” — Luca Pacioli
We start with some preliminary questions.
What is “accounting”?
Who invented accounting and why?
How does accounting relate to “nance”?
Why do we need to have a basic understanding of accounting?
A. WHAT IS ACCOUNTING?
Accounting is the language of business. It involves orderly assimila-
tion of numbers for the purposes of preparing nancial statements
and communicating with users of such statements. is involves
measurement of historical nancial information and its allocation to
scal periods. Measurement requires a systematic process of recording
nancial transactions in quantitative and relevant format so that users
can make decisions.
We refer to the initial mechanical process of recording nancial
transactions as “bookkeeping,” so-called because the information
was recorded in books of accounts. e information is summarized
according to accounting rules and principles in nancial statements,
which managers, directors, trustees, and advisors use to discharge
their duciary duties according to their legal mandates.
Financial Skills for Professionals
Businesses record transactions at each stage of their business cycle
to determine the protability of the enterprise, track cash ows, and
determine what they own and owe. At the end of the enterprise’s
scal period, accounting statements will present a snapshot of the
business’s status and its protability for the scal period.
e primary emphasis of nancial statements is on information
about past economic transactions and events that are nancial in
nature and can be expressed in nancial terms. However, it is often
necessary to estimate future transactions and events. Hence, in a nut-
shell, accounting is nancial language and, as with all language, is
governed by rules, conventions, and principles. e process has four
distinct aspects:
Identication,
Measurement,
Recording, and
Communication.
Although all four of the above aspects are important in producing
fair and reliable statements, it is the fourth element (communication)
that is of greatest interest to end users of nancial statements, such as
business persons, investors, and professionals.
As with any language, accounting can be misunderstood. Hence,
this text focuses on understanding nancial statements and not as
much on their preparation. However, to understand and interpret
nancial statements, users must have at least a modest understanding
of the general concepts and principles that underlie their preparation.
is is particularly important as accountants often use arcane terms
and opaque language. ey speak an obscure language that few of
them will translate for the world at large. at should neither sur-
prise nor disappoint. Every profession seeks to ring its territory with
a wide moat. For example, it was not entirely accidental that lawyers
in medieval England drafted pleadings in Latin and presented oral
arguments in Norman French, which eectively prevented all but a
few from understanding their “science.
Accounting is not a new discipline. e mathematics of modern
accounting had their origins in Renaissance Italy, where the merchants

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