Accounting Fundamentals: Stakeholders, Processes, and Business Structures

What does accounting do?

Collects and explains information about how an organization uses its money/resources, and reports on business performance, so stakeholders can make decisions.

Who are internal stakeholders?

Owners, managers, and employees (inside the organization).

Who are external stakeholders?

Banks, governments, and customers (outside the organization).

What is financial accounting information?

Numbers about money, such as income and profits.

What is non-financial accounting information?

Important information that isn't about money, e.g. customer satisfaction.

What are 'resources' in accounting?

Assets controlled or owned by an entity and used as inputs to its business activities (e.g. machines, equipment, raw materials, employees).

What is 'performance' in accounting?

The outcome of using resources for business activities â€" can be financial, customer, employee, supplier, social, or environmental performance.

What are the four steps of the accounting process?

Identifying, Measuring, Communicating, Decision Making.

What happens in the 'Identifying' step of accounting?

Working out what money-related events happened (sales, costs, buying equipment).

What happens in the 'Measuring' step of accounting?

Putting a dollar value on events; analysis and classification of transactions.

What happens in the 'Communicating' step of accounting?

Reporting via financial statements to users like owners, managers, banks, and government.

What happens in the 'Decision Making' step of accounting?

Accounting information is used for a range of decisions by internal and external users.

List key external users/stakeholders of accounting information.

Shareholders (current/prospective), customers, suppliers, banks, employees, government authorities (ATO, ASIC).

What is financial accounting?

The preparation and presentation of financial statements to allow users to make economic decisions.

What three things do financial statements consist of?

Cash flows, financial position, and profit or loss.

What is management accounting?

Providing economic information for internal users, used for planning and decision making, including budgeting and control.

Financial vs Management Accounting: Regulations

Financial accounting is bound by GAAP, Corporations Act, ASX rules; management accounting has no prescribed rules and is built for managers.

Financial vs Management Accounting: Timeliness

Financial accounting reports historical (often outdated) info; management accounting can be historical or projected (e.g. a budget).

Financial vs Management Accounting: Level of detail

Financial accounting is mostly quantitative and consolidated; management accounting is more detailed, tailored, and both qualitative and quantitative.

Financial vs Management Accounting: Main users

Financial accounting serves many different users; management accounting mainly serves owners and managers inside the entity.

What is an 'entity' in accounting?

A person, partnership, organization, or business with a legal and separately identifiable existence.

What is an 'organisation'?

A collection of people who work toward a common goal or objective.

What are the three organisational forms?

Sole trader, partnership, company.

What is an SME?

A small to medium sized enterprise â€" per the IASB, an entity without public accountability that publishes general purpose financial statements for external users.

Sole proprietorship: legal entity status?

No separate legal entity â€" the owner personally must negotiate contracts, borrow, sue, or be sued.

Sole proprietorship: life span?

Limited life â€" the business generally ends if the owner stops running it.

Sole proprietorship: liability?

Unlimited liability â€" owner is personally responsible for all debts; personal assets can be targeted.

Sole proprietorship: reporting requirements?

Minimum reporting rules â€" generally lighter than other structures (though GST may require detailed reporting).

Sole proprietorship: access to funds and setup costs?

Limited access to funds (relies on owner's personal resources) but has lower setup costs than other structures.

Partnership: legal entity status?

No separate legal entity â€" partners (not the partnership) sign contracts and can sue or be sued.

Partnership: life span?

Limited life â€" if a partner leaves or a new one joins, the partnership usually ends and a new one is formed.

Partnership: liability?

Unlimited liability â€" partners are personally responsible for all debts and obligations.

What is 'mutual agency' in a partnership?

Each partner can act for the business, and all partners can be held responsible for what one partner does.

Partnership: ownership of assets?

Shared ownership â€" business assets are owned together by the partners, not individually.

Partnership: profit and loss?

Shared equally or in an agreed proportion among partners.

Partnership: membership limit?

Usually limited (often up to 20, with some exceptions).

Partnership: regulation?

Governed by partnership acts â€" more regulation than a sole trader.

What should a partnership agreement include?

Name of the partnership and each partner's cash/asset contributions; if no agreement exists, the law assumes profits/losses are shared equally.

What are the methods of sharing partnership profits or losses?

According to each partner's contribution, splitting equally, or based on salary requirements.

What are company owners called?

Shareholders.

Is a company a separate legal entity?

Yes â€" independent and separate from the people who own, control, and manage it.

What liability do company shareholders have?

Limited liability â€" limited to the purchase price of their shares.

What is a company's life span?

Unlimited life â€" not dissolved if an owner leaves or changes.

What does ASIC allocate to a new company?

A unique ACN (Australian Company Number), as well as an ABN.

What are the two main types of companies?

Proprietary companies (private, common for SMEs) and public companies (capital via shares, various liability structures).

List characteristics of a company.

Limited liability, lower tax rates, easier expansion, ability to raise capital, but time-consuming/costly to run, strict legal obligations, and tax applies from the first dollar of profit.

How can limited liability of a company be undermined?

If banks require directors to give personal guarantees for loans.

What issue can arise from separation of ownership and control in a company?

Conflicts between shareholders and managers.

What are the two main professional accounting associations in Australia?

CPA Australia and Chartered Accountants Australia and New Zealand (CAANZ).

What is a 'for profit' organisation?

One created to generate profit, typically for owners/shareholders.

What is a 'not for profit' organisation?

One established to satisfy particular needs, not mainly for pursuit of profit.

What is a 'social enterprise'?

A 'for profit' business, but profits serve a social purpose rather than owners/shareholders.

What is business sustainability?

Using resources today without harming future generations' ability to meet their own needs.

What must entities account for regarding inputs and outputs?

Inputs: water, air, materials, labour. Outputs: products/services, plus waste and carbon emissions.

What are the key drivers of sustainability?

Competition for resources (scarcity), climate change, economic globalization, connectivity and communication.

What is 'accountability' in accounting?

Being responsible for your actions and reporting on them to others.

What are the two core duties of accountability?

Action (meeting stakeholder expectations) and Reporting (giving a clear account of those actions).

What is CSR (Corporate Social Responsibility)?

A business going above and beyond legal requirements to support wellbeing of society, environment, and community through ethical behaviour.

What is social accounting?

Information about an organisation's impacts upon specific people or societies.

What is environmental accounting?

Information about an organisation's impacts upon living and non-living natural systems (land, air, water, ecosystems).

What data does social/environmental accounting require?

Financial data (costs/revenues of efforts) and non-financial data (legal compliance, waste/pollution levels, PR, health & safety, community/environmental impacts).

What is an 'externality'?

A side effect (impact) a business causes to outside parties who had no say in the matter.

What are the two types of externalities?

Positive (unintended benefits to society) and negative (unintended costs/harm, e.g. pollution).

What is the modern accountant's role regarding externalities?

Tracking and reporting non-financial side effects as a standard responsibility.

What is the 'shareholder approach'?

The traditional view that an organisation's goal is to maximize value for its shareholders.

How can shareholder value be maximized?

Boosting profits, raising stock value, and increasing dividend payouts.

What is the main goal of the Integrated Reporting Framework?

To show investors and capital providers how a company creates long-term value.

What is the core concept of Integrated Reporting?

Combining financial, environmental, social, and governance information into a single report.

List the 6 capitals in Integrated Reporting.

Financial, Manufactured, Intellectual, Human, Social & Relationship, Natural capital.

What is Financial capital?

Funds available to the company (money, investments).

What is Manufactured capital?

Physical assets like buildings, equipment, and infrastructure.

What is Intellectual capital?

Knowledge, patents, software, and brand reputation.

What is Human capital?

Employees' skills, health, motivation, and expertise.

What is Social and relationship capital?

Relationships with communities, customers, and partners.

What is Natural capital?

Environmental resources used, like water, land, air, minerals, and energy.

What is the purpose of GRI Standards?

To encourage businesses to create sustainability reports that increase transparency and accountability, using a standardized, credible measurement approach.

List benefits of environmental reporting.

Improved stakeholder relations, new market opportunities, credibility with investors/banks, better internal environmental management, encouraging sustainable operations, and meeting legal/voluntary obligations.

List benefits of sustainability reporting.

Builds public trust, attracts/retains employees, improves investor standing, gives competitive edge in contracts, lowers regulatory risk, boosts efficiency, and strengthens stakeholder engagement.

What is a value chain?

A concept introduced by Michael Porter (1985): the sequence of activities a business performs to build, deliver, and support its products/services.

List the 5 primary activities in a value chain.

Inbound logistics, Operations, Outbound logistics, Marketing and sales, Services.

What is 'Inbound logistics'?

Receiving, storing, and managing raw materials.

What is 'Operations' in the value chain?

Transforming raw inputs into final products or services.

What is 'Outbound logistics'?

Storing, shipping, and distributing the finished good to customers.

What is 'Marketing and sales'?

Pricing, advertising, and selling the product to attract consumers.

What is 'Services' in the value chain?

Post-purchase support, including repairs, customer service, and returns.

List the support activities in a value chain.

Procurement, Human Resource Management, Infrastructure, Technological Development.

What are value-added activities?

Necessary steps that directly transform raw materials into finished goods efficiently, done right the first time, that customers are willing to pay for.

What are non-value-added activities?

Unnecessary or wasteful process steps that add no real worth and that customers are not willing to pay for.

What is the difference between total costs and unit costs?

Total costs = overall cost to produce all units; Unit cost = total cost divided by quantity.

What is a variable cost?

A cost that changes depending on how much you produce, e.g. raw materials.

What is a fixed cost?

A cost that stays the same regardless of production volume, e.g. rent.

What is a mixed cost?

A cost with both fixed and variable elements, e.g. a phone plan with a base fee plus usage charges.

What is a direct cost?

A cost tied directly to inventory/a specific unit; only becomes an expense when sold.

What is an indirect cost?

A cost that cannot be traced directly to one specific item, e.g. factory electricity.

What is a product cost?

A cost tied directly to manufacturing/inventory; becomes an expense only when the product is sold.

What is a period cost?

A cost tied to a specific time period rather than production, e.g. monthly sales and admin salaries.

What is the difference between actual and budgeted costs?

Actual costs are the real money spent; budgeted/standard costs are estimated costs planned ahead of time.

What is a relevant cost?

A future cost that differs between choices and impacts a decision.

What is an incremental cost?

The extra cost incurred by choosing one alternative over another.

What is an opportunity cost?

The potential profit or benefit lost when choosing one option over another.