Introduction

• Author: Vern Krishna
• Pages: 1-20

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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