Business Accounting: What It Is and How It Works

Every business, no matter how big or small, deals with money. Money comes in, money goes out. But if you do not keep track of where it is going and where it is coming from, you are basically running your business blindfolded. That is where business accounting comes in.

Business accounting is the process of recording, summarizing, and analyzing every financial transaction that happens in a company. It is not just about crunching numbers — it is about creating a clear picture of your company's financial health. Revenue, expenses, assets, liabilities, and equity are all tracked so that you always know exactly where your business stands financially.

This information is essential for everyone connected to the business. Internal stakeholders like the board of directors, managers, and employees need it to make day-to-day operational decisions. External stakeholders like investors, lenders, and regulators need it to evaluate risk and make informed choices. And let us not forget the legal side — accurate accounting is required by law to comply with tax regulations and financial reporting standards.

Business accounting is built on several key components. Each one plays a specific role in keeping your financial house in order. Let us walk through them.

Financial Transactions and Recording

Everything starts with a transaction. Every time your business buys something, sells something, pays a bill, or receives money — that is a financial transaction. And every single one of them needs to be recorded.

These transactions are recorded in two main books. First is the journal, which captures the details of each transaction — the date, the accounts involved, and the amounts. Think of it as a diary for your business finances. For example, if you sell a product for 5,000 taka on March 15, you write down the date, that it was a sale, and the amount.

Then comes the ledger. The ledger takes all those journal entries and organizes them by account. So all your sales go into one account, all your expenses into another, all your cash transactions into another. This gives you a bird's-eye view of how money flows through your business.

Chart of Accounts

A chart of accounts is basically a master list of all the accounts your business uses to track its money. Each account has a specific purpose — cash, sales, rent expense, equipment, accounts payable, and so on.

Think of it like organizing your wardrobe. You have separate drawers for shirts, pants, socks, and accessories. Similarly, a chart of accounts gives every type of transaction its own drawer. This makes it much easier to find, track, and analyze your financial data when you need it.

Financial Statements

Financial statements are the final output of your accounting process. They summarize everything into reports that tell you how your business is performing. There are three main financial statements:

The Balance Sheet shows your assets, liabilities, and equity at a specific point in time. It answers the question: what does the company own, what does it owe, and what is left for the owners? For example, if your business has 10 lakh taka in assets and 6 lakh in liabilities, your equity is 4 lakh taka.

The Income Statement (also called Profit and Loss Statement) shows your revenue, expenses, and net profit or loss over a specific period. It tells you whether the business actually made money or lost money. If you earned 15 lakh taka in revenue but spent 12 lakh on expenses, your net profit is 3 lakh taka.

The Cash Flow Statement tracks how cash moves in and out of your business. Just because you made a profit on paper does not mean you have cash in hand — the cash flow statement reveals the actual liquidity of your business.

Accrual vs. Cash Accounting

This is one of the most important decisions in accounting, and it affects how you record every transaction.

Cash accounting is the simpler method. You record a transaction only when cash actually changes hands. If you sell a product on credit, you do not record the sale until the customer actually pays you. It is straightforward — money in, write it down. Money out, write it down.

Accrual accounting is more sophisticated. You record a transaction when it happens, regardless of when the cash moves. So if you sell a product for 1,000 taka on credit, you immediately record 1,000 taka in sales — even though the money has not hit your bank account yet. Accrual accounting gives you a more complete picture of your financial situation, which is why GAAP recommends it for most businesses.

Here is a quick example. Suppose a customer buys goods worth 1,000 taka on credit. Under accrual accounting, you record the sale immediately. Under cash accounting, you wait until the customer pays. Same transaction, different timing — and the impact on your financial statements can be significant.

Debit and Credit

Debit and credit are the foundation of double-entry accounting. Every transaction has at least two entries — one debit and one credit — that balance each other out. This system ensures that the accounting equation (Assets = Liabilities + Equity) always stays in balance.

The rule is simple: debits increase assets and decrease liabilities, while credits increase liabilities and decrease assets. For example, when you receive 10,000 taka in cash from a customer, you debit your cash account (asset goes up) and credit your sales account (revenue goes up). Two entries, perfectly balanced.

Financial Analysis and Interpretation

Numbers alone do not mean much unless you analyze them. Financial analysis is the process of looking at your accounting data and figuring out what it actually means for your business.

Analysts use various ratios and comparisons to measure profitability, liquidity, efficiency, and solvency. For instance, if your profit margin dropped from 25% to 15% over the past year, that is a clear signal that something needs attention — maybe costs went up, or pricing is too aggressive. Every year, when companies publish their financial performance, management also provides commentary to help stakeholders understand what the numbers are saying.

Internal and External Reporting

Accounting data serves two audiences. Internal stakeholders — like managers, directors, and team leads — use financial reports to evaluate performance, set goals, and plan for the future. They need detailed, granular data to make operational decisions.

External stakeholders — like investors, lenders, government regulators, and tax authorities — need standardized financial statements to assess risk, make investment decisions, and ensure compliance. Sharing accurate financial reports with the outside world is like showing your report card — it tells everyone how well your business is doing.

Auditing and Assurance

Even the best accounting system needs a check. That is what auditing is for. An independent auditor examines your company's financial statements and records to verify that everything has been done correctly and in accordance with accounting standards.

External auditors review your processes, test your records, and then give an independent opinion on whether your financial statements are fair and reliable. Think of it as a quality check — it builds trust and credibility with everyone who relies on your financial data.

Let us walk through how accounting works in practice, step by step, using a simple example.

Step 1: A transaction happens. You sell a product for 1,000 taka. You record this as a sales transaction in your journal. Date, account name, amount — all captured.

Step 2: You classify it. Your business has a Sales account. You place this transaction under that account. This is like sorting your money into the right pocket — so you know exactly where it came from.

Step 3: You summarize. Your business does dozens or hundreds of transactions every day. You take all the sales transactions and put them together in a Sales Journal. This way, you can quickly see how much you earned from sales in any given period.

Step 4: You prepare financial statements. From the journals and ledgers, you create your income statement, balance sheet, and cash flow statement. These reports tell the whole financial story of your business.

Step 5: You analyze. Now that you have the statements, you interpret them. Are expenses too high? Is one product selling better than others? Is cash flow healthy? This analysis helps you decide what to do next — expand, cut costs, invest more, or change strategy.

Step 6: You make decisions. Based on your analysis, you take action. If a product is not selling well, you either promote it harder or drop it. If costs are rising, you find ways to cut them. Your financial data guides every major business decision.

Step 7: You report. Your business is not just about you. Stakeholders need to know how things are going. Internal teams use the data for day-to-day management. External parties — investors, regulators, banks — rely on your financial statements to make their own decisions about your company.

Business accounting is not just a back-office function — it is the backbone of every successful company. From recording the very first transaction to preparing final financial statements, every step in the accounting process serves a critical purpose. It keeps your finances organized, your stakeholders informed, and your decisions grounded in real data.

In a world where numbers drive success, accounting gives businesses the tools to navigate complexity, allocate resources wisely, and grow with confidence. Whether you are a startup founder tracking your first sales or a CFO managing a multinational corporation, the fundamentals of business accounting remain the same — record everything, analyze it carefully, and let the data guide your decisions.