Chapter: 1 - Importance of Accounting

Accounting is the art of consolidating the financial information that should be clear and understandable to the organization. Most importantly, accurate Financial Reports can be obtained since the financial records will reflect the company’s performance. They serve us in gaining a better understanding of the company's financial situation, keeping track of the Profit and Loss of the organization, and comparing the financial status with a previous period.

Similarly, Budget Management, which is one of the core operations of every organization, puts forward new strategies and business plans based on the historical data and gains recorded. So the records should be managed accurately to take the right decisions for the business by management and make the organization profitable.

Double-entry Bookkeeping System

The Double-entry bookkeeping system in Accounting records the transactions on two sides, known as debit and credit. In fact, for this system, if any transaction happens affecting an account, it must have a counterpart that affects another account. Thus, there will be a Credit value (right side) and its counterpart record as a Debit value (Left side). And at the end, the debit should be equal to the credit. The accounts that are credited and debited are listed in the company chart of accounts.

For example, when a sale happens for $100, the Income Account and Receivable Account get affected. Since the income increases, the income accounts credit $100 and as assets increase, the Receivable Account debits $100. How the accounts should be credited or debited is based on the nature of the account.

Hierarchy of accounting

As a general accounting system, all its transactions must be accounted for in corresponding ledgers correctly. How the transactions are recorded on the credit and debit side of accounts is determined by its nature. There is a hierarchy where general accounting is following.


The four types of nature include Asset, Liability, Income, and Expense.

Natures Increasing Decreasing
Liability & Income Credit Debit
Expense & Asset Debit Credit

In some accounting systems, use ‘Equity’ as an additional nature that follows the rules of Liability and Income. The account groups with the nature of income and expenses affect the profit and loss report.



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