TINY
Explaining Accounting if you were a 5 yr old
By Akshat Chourasia
Imagine you have a toy box.
Every time you get a new toy, you put it into the box.
Every time you give away a toy, you take it out of the box.
But after a while, it gets hard to remember:
How many toys do I have now?
Which toys did I get?
Which ones did I give away?
That’s where accounting comes in!
Accounting is like keeping a notebook where you write down everything:
“I got a new teddy bear today!”
“I gave my toy car to my friend.”
At the end of the day, when you look at your notebook, you know exactly what’s inside your toy box — no guessing, no confusion!
👉 Accounting is just a smart way of keeping track of what you have, what you get, and what you give.
How Accounting Works?
Imagine you’re running your toy shop!
Every day, three things happen:
You get something (someone gives you toys or money — this is called income).
You spend something (you buy more toys or candies — this is called expense).
You keep track of everything (you write it all down — this is called record-keeping).
Now, here’s the simple way accounting works:
1. Record Everything
You write down every time you get or spend something.
For example:
Got ₹100 from selling a toy.
Spent ₹30 on buying candies.
2. Add and Subtract
You add the money you got and subtract the money you spent.This helps you know if you earned money or lost money that day.
3. Organize It Nicely
You put the information in groups:
How much you earned?
How much you spent?
What you still have?
(Just like organizing toys into teddy bears, cars, dolls, etc.)
4. Make Reports
At the end of the month, you make a report. It tells you:
How much money came in,
How much money went out,
How much is still left.
This helps you decide:
“Should I save more?” or “Can I buy a new toy?”
In Short:
Accounting works by writing everything down, organizing it, adding and subtracting it, and then making a simple report to understand your money or things better!
Types of Accounting
Just like you have different notebooks for school subjects (one for Maths, one for English, one for Drawing), accounting also has different types depending on what we are keeping track of!
Here are the main types:
1. Financial Accounting
👉 This is like making a report card for a business!
It records all the money that comes in and goes out, and prepares reports to show if the business is doing well or not.
(Example: Profit and Loss Statement, Balance Sheet)
2. Management Accounting
👉 This is accounting that helps the boss inside the company make better decisions.
It focuses more on planning and figuring out the best ways to earn more and spend less.
(Example: Budget Planning, Cost Cutting Strategies)
3. Cost Accounting
👉 This helps a company find out how much making something really costs.
Like, how much does it cost to make one toy? Or one packet of chips?
(Example: Calculating cost of raw materials, labour, and packaging)
4. Tax Accounting
👉 This is all about following the rules set by the government and paying the right amount of tax.
It’s like making sure you don’t get in trouble when it’s time to pay!
(Example: Filing Income Tax Returns)
5. Forensic Accounting
👉 This is like being a money detective!
When something suspicious happens with money (like cheating or fraud), forensic accountants find out what went wrong.
(Example: Investigating missing money from a company)
Why Accounting is Important?
1. It Keeps Things Organized
Accounting helps keep track of money, like a neat notebook that shows what you earned, spent, saved, or invested.
2. It Helps Make Smart Decisions
When you know exactly how much you have, you can plan better — whether it’s about buying new toys, saving for something big, or growing your business.
3. It Shows If You’re Winning or Losing
Accounting tells you if you are making profits (winning) or facing losses (losing).
Without accounting, you would be just guessing!
4. It Helps You Pay the Right Taxes
The government needs to know how much you earn so you can pay your taxes correctly. Good accounting makes this super easy and stress-free.
5. It Builds Trust
Whether it’s investors, banks, or even your family, clear and honest accounting builds trust.
It shows that you are responsible and serious about managing money.
Methods Of Accounting
When you’re keeping track of money, there are two main ways you can do it. These are called accounting methods.
Think of them like two different ways to write your story about earning and spending!
1. Cash Basis Accounting
👉 In this method, you record money only when it actually moves.
You record income when you receive cash.
You record expenses when you pay cash.
🧸 Example:
If you sell a toy today and get money today, you write it down today.
But if you sell a toy today and the customer says “I’ll pay you next week,” you wait until next week to write it down.
✅ Simple and easy — great for small businesses and individuals!
2. Accrual Basis Accounting
👉 In this method, you record money when you earn it or owe it, even if cash has not moved yet.
You record income when you make a sale (even if you get paid later).
You record expenses when you receive a bill (even if you pay it later).
🧸 Example:
If you sell a toy today, you write it down today, even if the customer will pay you next week.
✅ More accurate — used by bigger companies and required by accounting laws for many businesses.
🎯 Quick Summary:
| Feature | Cash Basis Accounting | Accrual Basis Accounting |
|---|---|---|
| When to record? | When money moves | When the deal happens |
| Simplicity | Very simple | A little more detailed |
| Best for | Small businesses, individuals | Bigger businesses |
In simple words:
Cash basis is like noting only when you have coins in your pocket.
Accrual basis is like noting when you earn or owe, even if coins haven’t moved yet!