Week 1 - Chapter, Accounting in action
Accounting is an information system that identifies records and communicates the economic
events of an entity to interested users.
1. Identify- involves selecting the economic activities relevant/relate to a particular entity
2. Record- keeping record of economic activities to provide history of the entity‟s financial
activities. It is important to realise, the activities must be kept in a systematic, chronological
order and measured only in dollars and cents.
3. Communicate- financial information must be presented in financial reports or statements
in a meaningful manner and must be in a standardised way for all accountants. Further the
information must be able to communicate and allow accountant‟s to analyse and interpret the
Why is accounting important and its role?
Accounting is important because:
Accounting information conveys information about business performance to others.
Decisions are made based on the information provided.
Poor accounting practices by businesses can produce information that is inaccurate or
This can lead to corporate collapses and financial ruin for many people involved.
Thus the role of accounting is
To assist people in making decisions about the allocation of scarce resources.
Accounting measures business activity, and processes it into reports to enable
communication of the information to users who are internal or external to the
entity. Who uses accounting data?
There are two types of user for accounting data – internal and external data.
Internal users – are managers who plan, organise and run a business. They need internal
reports such as investment centre performance evaluations, contribution margin statements
and cash budgets.
Reports: investment centre performance evaluations, contribution margin statements
and cash budgets.
Users: marketing managers, production supervisors, chief financial officers and other
External users- are users who are outside the company but still make contribution to the
company as a whole.
Shareholders (use information to make decisions to buy, hold or sell shares)
Creditors e.g. Suppliers, bankers (use information to evaluate risks of giving
credit and lending money)
Government and regulatory bodies e.g. ATO, ASIC (use information to
determine an entity‟s compliance with rules and regulations)
The role of corporate governance in enhancing the quality of financial reporting
Corporate governance is a system in which entities are directed, controlled, managed and
administered. It influences how the objectives of a company are set and achieved, how risk is
monitored and assessed, and how the performance of the entity is optimised.
What is the purpose of corporate governance?
The purpose of corporate governance is
To primarily, protect investors, shareholders and enhance the perception, reputation
and prosperity of the entity.
Governance is largely about the decision-making process of the entity, ensuring that
the goals and hence decisions made by management are aligned with those of
Corporate failures and collapses are costly, and impact employees, creditors,
investors and others. Therefore, good corporate governance prevents this from
Having good corporate governance encourages entities to create value and provide
accountability with the ultimate aim of improving the entity‟s performance and
attracting additional investment. The building blocks of accounting
Ethics- a fundamental business concept
Ethics the standards of conduct by which person‟s actions are judged as right or wrong,
honest or dishonest, fair or not fair.
Why is ethics important?
If you cannot depend on honesty of individuals you deal with, effective
communication and economic activity is impossible and information has no
The importance of sustainability reporting
Sustainability reporting or corporate social responsibility reporting is the reporting and
management of non-financial performance to interested stakeholders. Stakeholders want
more than just financial statements. Users of such information are interested in knowing that
when an entity is conducting its business activity in the provision of goods and services, they
do not cause unwanted harm or disadvantage to the community.
Sustainability reporting has three components but commonly known as triple bottom line:
Social bottom line- indicates how the entity deals with issues such as employee
working conditions and safety and security and the entity‟s support and contribution
to community services
Environmental bottom line- looks at how an entity‟s products or operations impact on
Economic bottom line- looks at the entity‟s profitability and business strategy
What are the advantages and disadvantages?
There is a growing number of Difficult to objectively quantify in
investors who look at the entity‟s dollar terms
impact on the environment- help Can be time consuming to collect
decide before investing information
Offers opportunities to manage risk
and create value in a number of
ways- increasing loyalty from
employees, customers and investors
through brand and reputation
Increased socially responsible
Can help decrease costs if
environmental damage were to
occur History of regulation
As new transactions developed and became a part of businesses accountants developed rules
and practices for recording them, these rules and practices became to be known as Generally
Accepted Accounting Principle.
Generally Accepted Accounting Principle accounting rules that indicate how to
report economic events.
As entities grew in size and complexity, more formal rules for accounting were required and
GAAP were gradually known as accounting standards.
Australia has adopted standards that are consistent with those produced by the International
Accounting Standards Board (IASB). The current trend in accounting standard setting is to
follow global standards. IASB is promoting this global convergence. Australia's accounting
standards are consistent with these global developments
While these accounting standards provide „rules‟ for dealing with various accounting issues,
the accounting standards were only established on problem-to-problem basis, thus eventually
lead to inconsistency in rules and regulations.
Therefore, the conceptual frame work was developed.
Conceptual framework is a coherent system of interrelated objectives and fundamentals that
can lead to consistent standards.
What is the purpose of the conceptual framework?
Develop standards that are consistent and logically formulated
Provide guidance to accountants in areas where no standards exist
Enable users of financial statements to understand better the standards developed
In essence, the conceptual framework attempts to de