What accounting is for
Company analysis teaches you to read the statements. This subject is about where they come from — who prepared them, under what rules, and how much judgment went in before you ever saw a number.
Chapter 1 · Beginner
Chapter 1 of the Company analysis subject taught you to read an income statement. This subject is the other half: where that statement came from, who decided what it may contain, and how much of it is a judgement rather than a fact.
You cannot tell a conservative company from an aggressive one without knowing which choices were available to both.
The problem accounting solves
A business does thousands of things a year. Someone has to turn that into a few pages that a lender, an owner and a tax officer can all use.
That is an information asymmetry problem. The people inside know what happened; the people outside supplying the capital do not. Accounting is the agreed language that moves information across that gap, and a standard-setter exists because a language only works if everyone uses the same one.
So accounting is not primarily about arithmetic. The arithmetic is trivial. It is about the rules deciding what gets counted, when, and at what value — and those rules are written by people, revised regularly, and contain deliberate choices.
Two different activities under one word
Financial accounting produces statements for people outside: shareholders, lenders, regulators, tax authorities. It is standardised and audited, because the readers cannot verify anything themselves.
Management accounting produces information for people inside: unit costs, segment profitability, budgets. No standard governs it, because the reader can ask questions.
This subject is about financial accounting, for one reason — it is the only kind outsiders ever see.
Who writes the rules in India
The chain matters, because it tells you what is law and what is convention.
Parliament passed the Companies Act 2013. It requires companies to keep books and prepare financial statements, and it is statute.
The Ministry of Corporate Affairs notified the Companies (Indian Accounting Standards) Rules, 2015 under that Act. This is what gave Ind AS legal force — a standard is not merely best practice once it has been notified under an Act.
The ICAI, set up by an Act of Parliament, develops the standards and publishes the educational material behind them.
SEBI adds listing-specific requirements on top, for listed companies only.
Ind AS are converged with IFRS, not identical to it. The differences are deliberate and are called carve-outs; chapter 13 is about them and why they exist.
What the statements are
| Statement | The question it answers |
|---|---|
| Balance sheet | What does the business own and owe, at one instant? |
| Statement of profit and loss | What did it earn over a period? |
| Cash flow statement | Where did cash actually move? |
| Statement of changes in equity | What happened to the owners' stake? |
| Notes | Everything the four above are too compressed to say |
The notes are not an appendix. They contain the accounting policies — the choices made — and they are where the four numbered statements become interpretable. Chapter 15 of the Company analysis subject makes the same point from the reader's side.
Judgement is not a defect
The hardest idea in this subject, and the most useful:
Profit is an estimate. Not a measurement. Deciding profit requires deciding when revenue is earned, how long an asset will last, how much of a receivable will never arrive, and what a lawsuit might cost. Every one of those is a judgement made by management.
Cash is closer to a fact, which is why chapter 6 of the Company analysis subject gives the cash flow statement the weight it does — and why chapter 14 here shows how that statement is actually built.
This does not make accounts untrustworthy. It makes them a set of claims with an author, and knowing the author's latitude is what reading them well consists of.
What the audit does and does not say
An audit is an opinion on whether the statements give a true and fair view in accordance with the applicable framework. It is not:
- a guarantee of accuracy on every number
- an opinion on whether the business is a good investment
- a search for every possible fraud
Understanding that boundary is where sceptical reading begins, and it is why chapter 7 of the Company analysis subject treats the auditor's report as a document to read rather than a formality to skip.
The point
Accounting exists because the people supplying capital cannot see inside the business, and it works only because everyone uses the same rules. In India those rules are Ind AS, notified by the MCA as the Companies (Indian Accounting Standards) Rules 2015 under the Companies Act 2013 and converged with — not identical to — IFRS. Profit is an estimate produced by a series of judgements; knowing which judgements were available is what reading a statement properly requires.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Open any listed Indian company's annual report and find the auditor's report. Write down what the auditor states an opinion on, and — more importantly — what they explicitly state they are not responsible for.
An audit opinion is narrower than most readers assume. Finding its limits is the beginning of reading a statement properly rather than trustingly.