ACCT1005 W1 LE1
Accounting is more than just recording and reporting business transactions, it is also what we do with information generated by the accounting system that have many uses and benefits in business in everyday life. Accounting is a broad discipline that focuses on the current state of an organisation's financial activities. Accounting can be seen as basic bookkeeping, to analysing the company's financial health, forecasting revenue, preparing taxes, and ensuring legal compliance. Insights produced by accountants and finance teams overall inform and shape the strategy for all corners of the business. Accountants work closely with stakeholders, including executives, investors and boards, and human resources, IT, sales and marketing teams. Accounting function is vital to success.
Accounting: a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholder to enable the successful operation of businesses, people and nature.
The earliest evidence of accounting was clay tablets believed to be from 3300BC Egypt and Mesopotamia. Merchant Benedetto Cotrugli is credited with inventing the debit/credit accounting system in 1458. Franciscan monk Luca Bartolomes Pacioli described double entry bookkeeping in his 1494 book. Indigenous Australians are likely to have traded with foreigners before British settlement.
Type of accountant | Example of the work they do |
Financial accountant | Prepare financial information for external stakeholders e.g. shareholders, regulators, government |
Management accountant | Prepares accounting information for internal stakeholders e.g. managers for decision making |
Auditor | Independent accountants who audit the financial statements to ensure they are accurate and truthful |
Business advisor | Prepare and use financial information to provide advice to businesses to assist in strategy and decision making |
Tax accountant | Prepare accounting information and reports for taxation purposes |
Financial planner | Works with clients to help manage money, investments, and long term goals e.g. retirement |
Forensic accountant | Investigate the finances of a business or individual to establish facts to resolve disputes or crime allegations |
Accounting helps organisations demonstrate accountability by showing how a business has allocated scare resources, such as cash and assets, through financial reporting. This builds trust and reputation for the accountable organisation. Accounting is a trusted profession which upholds high ethical standards to ensure business reports are correct and transparent thereby demonstrating accountability. Understanding accounting is going to be crucial to help make the best decisions for business, people and environment effected by the business activities.
Accountability is different for different organisations. All organisation are accountable to their stakeholders.
Even government organisations are accountable to taxpayers about how they allocate the taxes collected from individuals and businesses.
Not for profit and charity organisations are accountable for how they spend money generously donated to their cause.
Businesses are accountable to all stakeholders and accounting helps businesses to demonstrate what stakeholders want to know about the business activities.
Private business are firstly accountable to their financial owners. Different business structure have different ownership structures.
Public listed companies may have millions of shareholders.
Ultimately, all organisations and businesses are more broadly accountable to all stakeholders, including customers, employees, government and industry regulators, the environment and society.
Business structures and their different types of accountability.
A sole trader is a legal business structure of one individual carrying on a business directly financially accountable to themselves.
A partnership consists of the association of two or more individuals who contribute money, property or services to operate as co-owners of the business. Partnerships are accountable to other partners.
A corporation, more commonly called a company, is a legal entity in its own right and is owned by one or more shareholders who are legally distinct from the company. Therefore the company is accountable to its shareholders.
In this subject, a business may also be referred to as an entity or an organisation. In accounting we don’t refer to a business as a company because a company is a particular type of business structure and not all businesses are companies.
Financial statements are the outcome of the accounting that communicates the financial performance and financial position of the organisation to various stakeholders. Each financial statements represents the organisation from a different financial perspective.
The Statement of Profit or Loss, also called the Income Statement, tells of the financial performance through the income and expenses of the business usually for a 12 month reporting period.
The Statement of Financial Position, also called the Balance Sheet, represents a snapshot of the business net worth at the end of the reporting period through the assets, liabilities and equities of the business.
The Statement of Changes in Equity is specifically focused on the changes in the value of the equity of the business. Equity, also called the owner's equity or shareholders equity, relates to the financial interactions of the business and the owners of the business or shareholders.
The Statement of Cash Flows tells the story of the business in terms of how cash moved in and moved out of the business during the reporting period.
Business transaction: an event affecting the financial position of a business that can be reliably measured and recording. The exchange of something of value between two or more entities, and this may be cash, services or goods.
e.g. A capital contribution by owners, payment of salaries and wages to employees, or earning revenue through the sale of goods or services.
Accounting process: identifying, measuring and communication of financial information to various users for decision making purposes.
Identifying a business transaction and capturing relevant information about the transaction.
Recording of the information in a systematic format.
Periodically communicate financial information to stakeholders through accounting reports called the Financial Statements.
Decision making. The accounting information assists different types of users in making decisions in allocation of the scare resource of money. Different users need different information for making decisions. e.g. External users, such as banks, use financial statements to determine whether to extend credit to an entity. Internal users, such as managers, use accounting information to determine whether the entity is meeting it financial objectives.
A business transaction affects the financial position of an entity and the effect of a business transaction is best explained using the accounting equation. The account equation is accounting in a nutshell. It's the basis of how accounting works form how to record transactions to how to report a summary of all transactions in the financial statements. This equation (assets=liabilities + owner's equity) shows what assets the business has and how it came to obtain those assets, whether through incurring debt or whether it was provided by the owners.
Assets are economic resources that will provide future benefit. e.g. Cash can be exchanged for goods and services, and equipment can be used to generate income or otherwise support the operations of the business.
Liabilities are what businesses owes to third parties or external organisations. e.g. Unpaid taxes for utilises, loans taken out to buy assets and money owed to trade creditors.
Equity is made up of the contributions by business owners, and undistributed profits that the business has made. e.g. Cash that shareholders gave the business in exchange for shares plus earnings that the business has kept to finance future growth.
In the equation, it can be rearranged from assets=liabilities + equity to assets - liabilities=equity. The accounting equation is the golden rule of accounting and must always be in balance.